Episode summary
Mapping Global Central Bank Paths
Thoughts on the Market (Morgan Stanley)
· · Hosts: Seth Carpenter
Summary
Morgan Stanley’s economists see the U.S., Japan and Europe on different central-bank paths, with inflation and growth data likely to decide how far policy can move in 2026. In the U.S., the baseline is still modest above-trend growth around 2.4%, with tariffs keeping inflation sticky through the first quarter before pressures ease enough for the Fed to cut once or twice in the second half of the year. The main upside risk is that fiscal policy, the new bill, and stronger animal spirits keep demand and inflation firmer than expected, leaving the Fed on hold.
In Japan, the view remains constructive on growth, but the guest said yen weakness is becoming more important because imported inflation and household expectations could force the Bank of Japan to hike earlier than the current January 2027 assumption. In Europe, the argument was that disinflation may not be finished despite recent ECB messaging. The guest expects energy, base effects, and weaker wage pressure to pull inflation below target, opening the door for ECB cuts in June and September to a 1.5% terminal rate.
Key takeaways
- The U.S. forecast is for about 2.4% growth in 2026, with one or two Fed cuts likely only if inflation cools after the first quarter.
- The guest said the biggest U.S. upside risk is stronger-than-expected fiscal stimulus and animal spirits that keep inflation from decelerating.
- Japan’s central bank may have to hike earlier than January 2027 if yen weakness pushes imported inflation and household inflation expectations higher.
- The Europe view is more dovish than consensus: inflation could fall below target, allowing ECB cuts in June and September to a 1.5% terminal rate.
- The guest argued that Germany’s weak export manufacturing sector and softer wage gains are key reasons Europe may see further disinflation.
Notable quotes
“We think that'll happen at least through the end of the first quarter. It's our view that after that inflation pressures will start to diminish”
“If the bill is more catalytic to animal spirits and business spending than we've assumed, you could get say demand-driven animal spirits upside to the economy”
“we are constructive on the Japan macro outlook. We think normal GDP growth remain strong”
“We think the chances for this are pretty good. There's a mix why this is happening”
“we believe the first inflation print of the year will change that debate significantly”
How the episode opens
Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's global chief economist and head of macro research. And today we're kicking off our quarterly economic roundt for the year.
And we're going to try to think about everything that matters in economics around the world. And today we're going to focus a little bit more on central banking. And when we get to tomorrow, we'll focus on the nuts and bolts, the real side of the economy.
I'm joined by our chief regional economist.
Hi Seth, I'm Mike Apen, chief US economist at Morgan Stanley. I'm Jet Naya, chief Asia economist. — And I'm Yenszen, chief Europe economist. — It's Thursday, January 22nd at 10 a.m. in New York and 400 p.m. in Frankfurt — And 9:00 p.m. in Hong Kong.
So, Mike Gapen, let me start with you. As we head into 2026, what are we thinking about? Are we going into a more stable expansion? Is this just a different phase with the same amount of volatility? What do you think is going to be happening in the US as a baseline outlook? And then if we're going to be wrong, which direction would we be wrong?
Yeah, Seth, we we took the view that we would have more policy certainty. Recent weeks have maybe suggested we're incorrect on that front, but I I still believe that when it comes to deregulation, immigration policy, and fiscal policy, we have much more clarity there than we did a year ago. So, I think it's another year of modest growth, above trend growth.
We're forecasting something around 2.4%. For 2026, that's about where we finished uh 2025. I think what's key for markets and the outlook overall will be whether inflation comes down.
Firms are still passing through tariffs to the consumer.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- global central bank paths
- interest rates outlook
- us rates
- japan rates
- europe rates
Watch the episode
Watch “Mapping Global Central Bank Paths” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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