Morgan Stanley: Fed to Hold Rates Steady for the Rest of the Year
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Morgan Stanley reaffirmed its call that the Fed will not raise rates this year, citing cooling inflation and employment data — but warned the view hinges on subsequent readings staying soft.
What did the inflation data show?
July core CPI rose 0.22% month-on-month, following a negative print in June — two consecutive soft readings.
This means → June's weakness was not a one-off; the July figure reduces the risk of reversal.
Morgan Stanley says two soft prints are not enough — it wants roughly three consecutive reports showing disinflation before gaining full confidence in a "no hike" call.
Tariff-related price pressures have largely faded, housing inflation is moderating, and second-round oil-price effects remain limited.
How much has the labor market cooled?
July nonfarm payrolls fell by 23,000; the three-month average dropped to 20,000.
Private-sector payrolls averaged roughly 40,000 over three months — close to what Morgan Stanley estimates is the break-even level for stable employment.
In plain terms = the job market is not collapsing, but it is sitting right on the line between growth and contraction — a clear cooldown from earlier this year.
Why is the September meeting the key test?
Morgan Stanley sees the September Fed meeting as the critical checkpoint.
By then, markets will have August CPI and nonfarm payrolls, plus Fed Chair Kevin Warsh's remarks at the Jackson Hole symposium.
Implied odds of a September hike have already fallen below one in three, yet Morgan Stanley maintains its base case of no hike this year.
What does this mean for markets?
If the Fed indeed stands pat, Morgan Stanley sees an opportunity in yield-curve steepening — long-end rates rising relative to the short end.
This means → the short end stays anchored by "no hike," while the long end prices in the economic outlook, widening the gap.
On currencies, recent data reinforce the view that the dollar will struggle to rebound near-term and may compress the expected U.S.–Japan rate differential, easing depreciation pressure on the yen.
Content is for reference only, not financial advice.