Morgan Stanley changes its Fed forecast, expects another 25bp rate hike in July

Morgan Stanley added a 25-basis-point rate hike to its Fed policy forecast. Morgan Stanley’s Chief US economists changed the investment firm’s Fed forecast as the bar for a “is significantly lower than we had initially expected.”

“What changed? During his testimony before Congress last week, Chair Powell made several remarks hinting that the Fed is reducing the pace while it approaches the appropriate level of monetary tightening,” they said in a note.

The updated forecast now sees Fed funds rate at 5.375% at the end of 2023 and 4.375% at the end of 2024. Morgan Stanley continues to believe that soft landing will stave off rate cuts to next year.

“We now think the Fed will hike in July- our data forecasts have not changed, but our perception of the Fed’s reaction function now points to a significantly lower bar to hike. In other words, we would need very weak data prints to convince the FOMC that its forecasts are wrong by the July meeting,” they added.

Looking beyond July, they say that new hikes “are data dependent.”

“We think that incoming data will force a change in the September FOMC projections and the Fed will hold rates at a peak of 5.375%,” the economists concluded.