The Federal Reserve remains cautious, and Morgan Stanley believes there will be no interest rate cuts this year, with seven cuts starting in March next year
Federal Reserve Chairman Jerome Powell reiterated a wait-and-see stance, awaiting more economic data to clarify policy direction. Morgan Stanley analysts predict that due to tariff policies pushing up inflation, they expect no interest rate cuts for the entire year of 2025, with cuts beginning in March 2026, totaling seven cuts throughout the year to a range of 2.5%-2.75%. Powell emphasized that the Fed's response will depend on the extent to which the economy deviates from its dual mandate, with tariff impacts expected to manifest in the third quarter. The impact of immigration policy on the labor market is also considered significant
Federal Reserve Chairman Jerome Powell reiterated a wait-and-see stance in his congressional testimony early on the 25th Beijing time, stating that the Fed will continue to wait for more economic data to gain clarity on policy direction.
According to news from the Chase Trading Desk, Morgan Stanley released its latest research report, with analysts Michael T Gapen and others predicting that due to tariff policies, inflation will rise to 3.0-3.3% this summer, while immigration control policies will keep the labor market tight. The Fed will not cut interest rates throughout 2025.
The investment bank expects that rate cuts will begin in March 2026, with a total of seven cuts throughout the year, bringing rates down to the 2.5%-2.75% range.
However, Morgan Stanley also acknowledged the risks: if the private sector has to bear more tariff costs than expected, the risks will shift to a weak labor market, and rate cuts may come sooner.
Fed Continues Wait-and-See Policy, Data Determines Everything
Morgan Stanley stated in the report that Powell reiterated the core message from last week's FOMC meeting:
"We are in a favorable position to wait to understand more about the potential direction of the economy before considering any adjustments to our policy stance."
He emphasized that the Fed will continue to maintain a wait-and-see mode until data provides more clarity.
The Fed believes the current economic situation is "solid," and policy is at a moderately restrictive level, which puts the central bank in a "good position" to wait and observe. Powell stressed that the Fed's response will depend on the extent to which the economy deviates from its dual mandate.
Tariff Impact Expected to Emerge in the Third Quarter
Regarding the impact of trade policy, Powell again mentioned that "tariffs may push up prices and weigh on economic activity," but the impact on inflation is uncertain—"it could be transitory" or "more persistent."
He explained that the transmission of tariffs will become more pronounced in the third quarter, as current inventory and pricing decisions will have a lag effect—"what is being sold today is inventory from February."
This aligns with Morgan Stanley's view that the lack of significant reflection of tariffs in the May inflation report is not surprising. However, Powell acknowledged the significant uncertainty ahead:
"We do not know how much will be passed on to consumers."
Immigration Policy Has Significant Impact on Labor Market, Morgan Stanley Maintains No Rate Cut Forecast for the Year
Powell discussed the potential underestimation of the impact of immigration policy by the market, and Morgan Stanley believes this could be a topic that the market has underestimated. He mentioned that the new policy "has indeed reduced the growth of the labor force," and even in this case, the domestic population cannot meet labor demand. This is consistent with the median forecast in the SEP, which indicates that the unemployment rate will moderately rise this year.
Morgan Stanley believes that against the backdrop of slowing population growth, the Fed will assess economic health based on per capita indicators. Due to the slowdown in the trend of working hours, per capita variables may appear to be markedly different from overall data, which may make the overall data seem relatively weak.
Based on current analysis, Morgan Stanley maintains its forecast that inflation will rise to 3.0-3.3% (core and overall PCE) by the end of the year, while immigration control will keep labor growth low, thereby maintaining tension in the labor marketBased on this judgment, the investment bank predicts that there will be no interest rate cuts in 2025, with cuts starting in March 2026, and seven cuts expected next year, targeting a range of 2.5%-2.75%.
However, Morgan Stanley also acknowledges the risks: if the private sector has to bear more tariff costs than expected, the risk will shift to a weak labor market, and interest rate cuts may come sooner.
Clear Divisions Within the Federal Reserve
From the latest Summary of Economic Projections (SEP), it is clear that FOMC participants have differing views on the appropriate path for future interest rates. When asked about Governor Waller's comments regarding a possible rate cut in July, Powell declined to comment on the views of other FOMC members, maintaining an ambiguous stance and acknowledging that "many paths are possible."
Importantly, Powell did not mention rate hikes as a possible outcome, which provides some comfort to the market.
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