Wall Street’s leading brokerage firm Morgan Stanley has shifted to a more hawkish outlook on interest rates, joining several other major banks in expecting further tightening by both the U.S. Federal Reserve and the European Central Bank (ECB) this year.
Federal Reserve outlook
The firm predicts the Fed will raise its benchmark rate by 25 basis points at its September 15‑16 meeting and deliver a second quarter‑point increase in December. Morgan Stanley’s note cites slower‑than‑desired disinflation and higher‑than‑expected inflation readings as the primary drivers behind the forecast.
“We see arguments for both a hike and a hold, but signs of second‑round effects from energy prices, strong demand tied to AI‑related investment, a neutral rate that is possibly temporarily higher, and concerns about credibility mean the balance of risks now argues for a somewhat more restrictive policy,” the brokerage wrote.
Kevin Warsh, who assumed the Fed chairmanship in May, has so far refrained from giving explicit guidance on the path of rates. Nonetheless, with inflation still running above the Fed’s 2% target, oil prices above $100 a barrel, and markets pricing in a rate increase, investors view this week’s meeting as likely to deliver the first hike of Warsh’s tenure.
European Central Bank outlook
In Europe, Morgan Stanley has revised its ECB outlook, now forecasting an additional 25‑basis‑point increase in December that would lift the deposit rate to 2.75%. The revision reverses an earlier view that the ECB’s tightening cycle had ended.
The brokerage points to resilient euro‑zone growth and higher energy prices as reasons to expect another ECB rate hike later this year. It also projects only one rate cut in 2027, scheduled for December.
Implications for markets
These forecasts come as global markets remain focused on the upcoming policy decisions from the Fed, the Bank of Japan, and the ECB. Investors will be watching inflation data closely, especially energy‑price developments and demand trends linked to artificial‑intelligence investments, which could influence the central banks’ next moves.
While the outlook suggests tighter monetary policy in the near term, Morgan Stanley notes that the disinflation process is expected to moderate, potentially allowing the Fed to signal a pause before any further tightening.
Overall, the brokerage’s more restrictive stance underscores the challenges policymakers face in balancing inflation control with sustaining economic growth.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
