Morgan Stanley says market expectations for a Fed rate cut in March are 'overdone'
Morgan Stanley economists weighed in on the current market expectations of a 70% chance of rate cuts beginning in March 2024.
This contrasts with the broker’s forecast, which points to a later start in June. Analysts suggest that clear and convincing evidence of inflation returning to the 2% target is needed before the Fed initiates rate cuts.
They anticipate sticky services inflation leading to higher inflation prints in the next two months, potentially causing a delay in rate cuts compared to market expectations.
“Our inflation forecasts point to a rise in inflation the next two months, so we think the market expectations for a rate cut in March are overdone,” analysts said.
Morgan Stanley acknowledges the noise in nonfarm payrolls data, stating that one weak print may not be sufficient for a rate cut. To trigger a rate cut in March, they suggest observing nonfarm payrolls below 50k for February and core CPI below 0.2% month-on-month.
“Risks are skewed to an earlier cut than our baseline,” analysts added.
Weaker inflation and jobs prints would increase the chances of a cut in May, with signs potentially appearing in the FOMC March Summary of Economics Projections.
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