Episode summary
The Global Rate Debate
Thoughts on the Market (Morgan Stanley)
· · 13 min · Hosts: Seth Carpenter · Guests: Michael Gapen, Yens Eisenmidz, Chetan Ahya
Summary
Central banks are navigating a more complicated backdrop than a few months ago: global growth has held up better than expected, inflation has eased but not disappeared, and policy choices are being shaped by AI spending, government spending and lingering supply-side pressures. The discussion centered on whether resilient demand leaves room for rate cuts, or whether it forces central banks to stay restrictive longer, or even hike again.
For the US, the view was that inflation should keep falling as energy, tariffs and housing inflation cool, with the bigger risk being stronger demand than expected rather than AI-driven price pressure in consumer goods. That outlook implies the Fed can stay on hold this year, though a miss on disinflation could still force a hike later in 2026. In Europe, the ECB faces a similar but subtler tension: inflation may not fall enough if demand stays firm, while fiscal policy and political fragmentation could matter for spreads and debt costs.
In Japan, the Bank of Japan is seen continuing normalization slowly, with two hikes expected as inflation remains more currency- and supply-driven than demand-driven. In China, weak domestic demand and soft infrastructure spending point to more fiscal support in the second half, even as exports remain a source of resilience.
Key takeaways
- The host said the base case for the Fed is no policy change this year because US inflation should keep easing toward 3% by year-end and 2.5% next year.
- One economist warned the Fed could still hike in September or later if core goods prices stay elevated or energy prices rise again.
- The ECB is viewed as still around neutral policy even after another possible September hike, but fiscal pressure and spread widening could complicate the path.
- The Bank of Japan is expected to hike twice, in December this year and June next year, but slowly because demand is still weak.
- China’s growth outlook hinges on fiscal execution, with about two trillion RMB of funds available for infrastructure spending in the second half.
Notable quotes
“our expectation is that inflation moves lower to about 3% by the end of this year and closer to 2 and a.5% next year”
“the risk is this inflation forecast is too optimistic. Inflation stays firm. The Fed needs to raise rates”
“we have here clearly not an AI boom that I mean there's no question”
“we are expecting BOJ to hike twice from here. The first rate hike is coming up in December of this year and then another one coming up in June of next year”
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 once again today, I am joined by Morgan Stanley's chief regional economist, Michael Gapen, the chief US economist, Yen Eisen Schmidt, our chief Europe economist, and on the other side of the world, Ched Naya, our chief Asia economist.
Yesterday, we talked about what's supporting growth around the world, especially AI spending in the US and some government spending in Europe and Asia's role in making all of this happen. Today we're going to try to dig deeper and go into policy. It's Tuesday, July 21st at 10 a.m.
in New York and 400 p.m. in Frankfurt
And 10 p.m. in Hong Kong.
Since the last time we did this in midappril, I will say the debate around central banks has probably become more complicated. Global growth has held up probably better than many people expected. And inflation, which picked up a lot, started to recede, but it has not gone away.
and some of the forces helping to shape the economy, the AI spending, government spending, that possible upswing in manufacturing that could keep demand strong and it might keep pushing inflation higher. So the question today is if growth remains resilient, how much room really do central banks have to navigate. Mike, let me start with you because your call for the Fed here in the US is out of consensus or at least at odds with where the market is pricing things.
We talked about the demand going from AI. You pointed out that imports are actually limiting how much domestic demand there is. So what is the underlying story for inflation in the US and what does it mean for the Fed?
So our view is that inflation will come down in the US.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- global rate debate
- central banks
- sticky inflation
- resilient growth
- regional policy trade-offs
Watch the episode
Watch “The Global Rate Debate” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Thoughts on the Market (Morgan Stanley)
Thoughts on the Market (Morgan Stanley), this episode and its artwork belong to Morgan Stanley. Octagon is not affiliated with the show; this page is an independent summary.
