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Morgan Stanley's team of economists, led by Ellen Zentner, expressed their views on current market expectations for a Fed rate cut in March 2024.
The market is currently pricing the probability of a rate cut at 70% starting in March. However, Morgan Stanley's forecasts contradict this and predict a later start in June.
Zentner states that the FED will need clear and convincing evidence that inflation has returned to its 2% target before starting interest rate cuts. The team predicts persistent services inflation will lead to higher inflation pressures over the next two months. This could potentially delay interest rate cuts, contrary to market expectations.
Zentner said, “Our inflation forecasts indicate that inflation will rise in the next two months, so we think that market expectations of a rate cut in March are exaggerated.”
Morgan Stanley also acknowledged that there is a confusing situation with non-farm payrolls data, stating that a single weak data may not be enough for a rate cut. According to analysts, in order to cut interest rates in March, non-agricultural employment must remain below 50 thousand in February and core CPI must be below 0.2% on a monthly basis.
“The risks are towards a disruption earlier than we anticipated,” Zentner said and added:
“Weaker inflation and employment data will increase the likelihood of a cut in May, with signs potentially appearing in the FOMC March Summary of Economic Forecasts.”
*This is not investment advice.