Morgan Stanley no longer sees Jan rate cut after hawkish Fed meeting

Investing.com– Morgan Stanley (NYSE:MS) expects the Federal Reserve to cut interest rates by a smaller margin in the coming year, with the central bank also expected to delay future cuts amid concerns over sticky inflation.

Morgan Stanely analysts said they no longer expect a 25 basis point cut in January 2025, and that the Fed will only cut rates by 25 basis points each in March and June. 

“The Fed’s hawkish turn appeared to reflect the incorporation of potential changes to trade, immigration, and fiscal policy by some members that led to a firmer inflation path and, in turn, a firmer policy rate path,” Morgan Stanley analysts wrote in a note. 

They still expect the Fed to cut rates at least thrice in 2026, but now see a higher terminal rate of 2.6%, compared to prior forecasts of 2.4%. 

Morgan Stanley’s revised rate outlook comes following similar moves by several of its peers. Goldman Sachs had also signaled earlier this week that it no longer expected a January cut, citing concerns over sticky inflation and strength in the labor market.

Traders were seen ramping up bets on a January hold, with a 91.1% chance the Fed will keep rates steady, up from last week’s probability of 75.4%, CME Fedwatch showed.

The Fed cut interest rates by 25 basis points on Wednesday, as widely expected. But the central bank struck a more hawkish tone than markets were expecting, as Chair Jerome Powell warned that the Fed will adopt a slower pace of cuts in the coming months. 

The central bank slashed its rate cut outlook for 2025, and is expected to cut rates only twice in the coming year. 

Powell flagged strong economic growth in the second half of 2024, and said that downside risks to the labor market had eased, necessitating a slower pace of monetary easing. 

The incoming Donald Trump administration could also provide more upside risks to inflation, especially amid pledges of expansionary and protectionist policies from the President-elect.