Economists at Morgan Stanley say rising oil prices and persistent inflation pressures could delay expected Federal Reserve rate cuts.
Speaking on the company’s ‘Thoughts on the Market’ podcast, Chief Economist Michael Gapen said say the Fed is likely to take a cautious approach and continue the expected rate cuts further into the year.
“I think the answer is caution and that the rate cuts will probably come later rather than sooner. So following the FOMC meeting, we have revised our view. We previously thought the rate cuts would happen in June and September. We have pushed that back to September and December.”
The short answer here is: I think that given the rise in oil prices and at least some renewed upward pressure on headline inflation, it will probably take longer for the Fed to conclude that disinflation is happening. So I think they need more time, and that obviously means the Fed cuts rates.”
The latest FOMC meeting underscored a strong institutional focus on inflation risks, with policymakers highlighting price stability concerns over labor market conditions. While unemployment remains stable, job growth has slowed significantly, pointing to a less dynamic labor market that could still warrant policy support later this year.
According to Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley, this backdrop could create opportunities in the fixed income markets.
“And I think if that’s what we ultimately see in the economy and in the Fed, the U.S. Treasury market is poised for quite a run through the end of the year. Today’s market isn’t pricing in that many rate cuts at all.
But I think if we achieve that outcome for the US economy and Fed policy, US Treasury investors will be rewarded. And even if they are not rewarded in the way they might expect or hope, the US Treasury market itself and the correlations it has produced with riskier assets such as the stock market suggest that, despite the recent sell-off, US Treasuries have behaved as good hedges for broader risky asset portfolios. So we certainly expect the US Treasury market to perform quite well in this scenario.”
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