MW Morgan Stanley's finally given up on the idea the Fed will cut in March. What went wrong.
By Steve Goldstein
Wall Street bank had expected a fast announcement/slow implementation tariff stance.
Morgan Stanley has now given up on its contrarian stance the Federal Reserve will cut interest rates in March.
It was an idea the firm held onto even after Fed Chair Jerome Powell's last press conference, when he made clear the central bank was in no hurry to cut interest rates.
But what made Morgan Stanley crack wasn't Powell but President Donald Trump.
"Our prior outlook for two cuts in the first half of the year was based on 1) a 'fast announcement/slow implementation' tariff policy, and 2) a preference for tariffs on trade with China over other trading partners. These assumptions left room for inflation to accelerate through mid-year without much trade policy uncertainty, providing a pathway for the Fed to cut its policy rate by 25bp in March and June. We still think these views are the right ones, but we are not as confident regarding slow implementation as we were before," said economists led by Michael Gapen.
Trump did pause tariffs against Mexico and Canada but left the 10% incremental tariff on China intact.
"We see this episode of on-again-off-again tariffs as amplifying the views expressed by the Fed at its December meeting, when most FOMC members were concerned about greater uncertainty regarding [the personal consumption expenditure price index] and saw risks to PCE inflation as tilted to the upside. That uncertainty and upside risk have arrived more quickly than we anticipated," said the economists.
CME's FedWatch tool, which is based on fed funds futures trading, implies a 16.5% chance of a March cut.
The 2-year yield BX:TMUBMUSD02Y, which is very sensitive to monetary policy, has been little changed this year.
-Steve Goldstein
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February 05, 2025 03:23 ET (08:23 GMT)
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