Morgan Stanley Tightens Its Stance, Projects Two Fed Rate Hikes and One from the ECB

Morgan Stanley has aligned with the consensus of Wall Street giants by tightening its monetary projections: it now anticipates new increases in interest rates from both the Federal Reserve and the European Central Bank during the year, driven by inflation that shows no signs of easing.{#p-1789484046259-35835}

These forecasts come ahead of the monetary policy decisions that the Federal Reserve and the Bank of Japan will make this week, just days after the ECB resumed its monetary tightening cycle, a framework that keeps global markets focused on the direction of interest rates.{#p-1789484196088-77412}

The Details

After inflation figures exceeded estimates, Morgan Stanley projects that the Fed will raise the key rate by 25 basis points at its meeting on September 15 and 16, complemented by an additional adjustment of the same magnitude in December.{#p-1789484196088-26960}

In a note published this Monday, the brokerage firm stated that the process of disinflation has been "slower and less convincing" than what the Federal Reserve authorities would require, a diagnosis that led it to project two rate hikes for the remainder of the year.{#p-1789484968186-54018}

The analysis projects that the Fed will maintain a tone of greater tightening in its upcoming communications and will only pause rate increases once a sustained moderation of inflation is verified.{#p-1789484410956-31355}

The brokerage indicated that "we see arguments both for a hike and for maintaining rates, but the signs of second-round effects stemming from energy prices, strong demand linked to investment in artificial intelligence, a neutral rate that may be temporarily higher, and concerns about credibility make the risk balance now point towards a somewhat more restrictive policy."{#p-1789484419991-63585}

From Caution to Reality

Since taking the helm of the Fed in May, Kevin Warsh has avoided giving concrete hints about the trajectory that interest rates will follow in the United States.{#p-1789484508603-24953}

The monetary policy decisions of the Fed and ECB attract global attention.{#p-1789486443776-70856}
Photo: White House

Despite the official caution, the market takes for granted a restrictive shift. With inflation above target, crude oil prices exceeding $100, and financial quotes aligned around a rate hike, investors expect this week's meeting to mark the first rate increase of the new mandate.{#p-1789484640397-37335}

In Europe, Morgan Stanley recalibrated its projections for the ECB by incorporating an additional increase of 25 basis points in December, an adjustment that will bring the deposit rate to 2.75% and nullify its previous diagnosis, according to which the tightening cycle of the institution had already concluded.{#p-1789484728968-96507}

Relying on the strength of the European economy and rising crude prices, the financial firm included a new rate hike from the ECB for this December. At the same time, it postponed the expansive shift and estimated that the institution will implement only one rate cut throughout 2027, scheduled for the end of that year.

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