Morgan Stanley now expects the Federal Reserve to raise rates twice this year and the European Central Bank to hike once more in December. The bank cites persistent inflation, resilient euro zone growth, and higher energy prices as the reasons behind its shift.
Morgan Stanley has joined other major Wall Street banks in forecasting further Federal Reserve rate hikes and another European Central Bank increase this year. The bank points to inflationary pressure that has proven more persistent than policymakers expected.
Fed seen delivering two hikes this year
Morgan Stanley expects the Fed to raise rates by 25 basis points at its September 15-16 meeting and deliver another quarter-point increase in December. Recent inflation readings came in above expectations, prompting the shift.
In a note on Monday, the brokerage said the disinflation process has been slower and less convincing than policymakers are likely to require. It also expects the Fed to signal further tightening before officials pause as inflation moderates.
According to Reuters: "We see arguments for both a hike and a hold", Morgan Stanley said, citing second-round effects from energy prices and strong AI-related investment demand.
Kevin Warsh, who took over as Fed chair in May, has repeatedly avoided offering guidance on the likely path of U.S. interest rates. But with oil trading above $100 a barrel and financial markets overwhelmingly pricing in a rate increase, investors see this week's meeting as likely to deliver the first hike of his tenure.
ECB reverses course with a December hike
In Europe, Morgan Stanley revised its ECB outlook to forecast an additional 25-basis-point increase in December, lifting the deposit rate to 2.75%. That reverses its previous expectation that the central bank's tightening cycle had ended.
The brokerage cited resilient euro zone growth and higher energy prices behind the call. It now expects just one rate cut in 2027, in December, instead of an earlier reversal.
The forecasts arrive ahead of policy decisions from the Fed and the Bank of Japan this week, days after the ECB resumed its tightening cycle.
Source: Investing.com
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