Morgan Stanley Sees No Fed Rate Changes This Year
Morgan Stanley expects the Federal Reserve to keep interest rates unchanged for the rest of the year. However, the Wall Street bank warned that persistent inflation or a stronger labor market could force policymakers to reconsider.
Minneapolis Federal Reserve President Neel Kashkari has also suggested that another interest rate increase may become necessary if inflation remains elevated.
What Could Trigger a Fed Rate Hike?
Morgan Stanley believes a rate hike is unlikely under current economic conditions. Still, the bank identified two developments that could change the outlook.
First, the Federal Reserve may consider tightening monetary policy if the U.S. unemployment rate falls below 4%. Second, policymakers could raise rates if inflation continues to exceed the Fed’s target.
Recent data showed that U.S. Personal Consumption Expenditures inflation climbed to 4.1%, reaching its highest level since 2023. This increase has renewed concerns that inflationary pressure remains stronger than expected.
However, falling oil prices could reduce some of that pressure. Energy prices have declined following the U.S.-Iran peace agreement, potentially helping to slow inflation and supporting the case for keeping interest rates steady.
Bank of America Predicts Multiple Rate Increases
Not every major financial institution shares Morgan Stanley’s outlook.
Bank of America reportedly expects the Federal Reserve to announce three interest rate hikes before the end of the year. Its forecast suggests that the first increase could arrive during the September Federal Open Market Committee meeting, followed by additional moves before December.
This difference in forecasts highlights the uncertainty surrounding the Federal Reserve’s next policy decision.
Traders Continue to Price In Higher Rates
Prediction markets and futures traders also believe another rate increase remains possible.
Polymarket data indicates that market participants see a 53% probability of at least one Fed rate hike this year. Traders believe the first increase could happen as early as September.
Meanwhile, CME FedWatch data shows that investors are pricing in possible rate increases during the September, October and December FOMC meetings. The probability of a September rate hike currently stands at approximately 47.3%.
These expectations suggest that financial markets remain divided over the direction of U.S. monetary policy.
Neel Kashkari Remains Concerned About Inflation
Neel Kashkari recently revealed that his economic projections included the possibility of an interest rate increase this year. He explained that signs of broader inflation across the economy influenced his outlook.
His concerns extend beyond geopolitical tensions and potential disruptions to global oil supplies. Instead, Kashkari believes inflationary pressure may be spreading across several areas of the U.S. economy.
The Federal Reserve also adopted a more hawkish tone following its June policy meeting. According to its economic projections, nine of the 18 Fed officials expected at least one rate hike during the year. Six of those officials projected more than one increase.
For now, Morgan Stanley continues to predict that interest rates will remain unchanged. Nevertheless, future inflation reports, employment data and energy prices will play a major role in determining the Federal Reserve’s next move.
