The Federal Reserve is currently in a rate-cutting cycle, but recent discussions suggest a rate hike is possible, according to Morgan Stanley analysts.
However, the bank believes that such a move is unlikely due to the “very high” need for the Fed to change course.
In a note on Monday, Morgan Stanley expects the Fed to continue cutting interest rates, albeit at a slower pace, as long as disinflation continues.
The firm predicts “one or two more cuts in the first half of the year,” with last week’s CPI data supporting this expectation.
While inflation concerns related to tariffs and immigration remain, the bank believes that “concerns about rising inflation should have subsided.”
The prospect of a rate hike is complicated by the central bank’s approach to policy.
According to Morgan Stanley, the Federal Open Market Committee (FOMC) tends to focus on the level of interest rates rather than their rate changes. Minutes from the December FOMC meeting showed that a “large majority” of participants viewed the current federal funds rate as “very tight.”
This suggests that policymakers believe current rates are sufficient to continue to exert downward pressure on inflation.
Morgan Stanley stressed that a shift from rate cuts to rate hikes would require a major shift in the Fed’s outlook.
“If the Fed concludes that it needs to raise rates, it could begin a series of rate hikes,” the analysts wrote. However, such a conclusion would require “several months of accumulated data” that show inflation continues to rise and policy is no longer neutral.
For now, Morgan Stanley remains in line with the consensus view: a rate cut is more likely in the near term, and a jump to a rate hike remains a “big move.”
