Economists at Morgan Stanley say rising oil prices and persistent inflation pressures could delay expected interest rate cuts from the Federal Reserve.
Speaking on the company’s “Market Thoughts” radio show, Chief US Economist Michael Gabbin said He says The Fed is likely to proceed cautiously, pushing expected interest rate cuts further into the year.
“I think the answer is caution and perhaps interest rate cuts will come later than before. So, we changed our view on the back of the FOMC meeting. We previously believed that interest rate cuts would take place in June and September. We have shifted it back to September and December.
The short answer here is that I believe that with oil prices rising and at least some renewed upward pressure on headline inflation, it will likely take longer for the Fed to conclude that disinflation is occurring. So, I think they need more time, and that obviously means the Fed is pushing to lower interest rates.
The recent FOMC meeting underscored the strong institutional focus on inflation risks, with policymakers emphasizing price stability concerns over labor market conditions. Although unemployment remains stable, job growth has slowed significantly, indicating a less dynamic labor market that could require political support later this year.
According to Matthew Hornbach, global head of macro strategy at Morgan Stanley, this backdrop could create an opportunity in fixed income markets.
“And I think if that’s what we end up seeing outside of the economy and outside of the Fed, then the U.S. Treasury market is set up to continue well through the end of the year. The market today isn’t pricing in many interest rate cuts at all to talk about.”
But I think if we get that outcome for the US economy and Fed policy, I think investors in US Treasuries will be rewarded. Even if they are not rewarded in the way they might expect or hope – the US Treasury market itself and the correlations it has provided vis-à-vis riskier assets such as the stock market, suggest that US Treasuries, despite the recent sell-off, have been behaving as good hedging securities for portfolios of riskier assets more broadly. So, we certainly expect the US Treasury market to do well in this scenario.
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