Episode summary
Why Fed Rate Cuts Could Be Pushed Back
Thoughts on the Market (Morgan Stanley)
· · Hosts: Matthew Hornbach, Michael Gapen
Summary
The guest says the Fed’s March meeting reinforced a more cautious path for policy, with rate cuts likely pushed later into the year. Morgan Stanley had previously expected cuts in June and September, but now sees them in September and December because higher oil prices and renewed upward pressure on headline inflation make it harder for the Fed to declare disinflation complete.
The host and the guest argue that Chair Powell’s press conference was dominated by inflation concerns, not labor market weakness. The guest says Powell’s answer on energy shocks was more conditional than expected: the Fed wants more clarity that tariff pass-through to core goods has ended before deciding whether to look through an oil-driven rise in headline inflation. That raises the bar for easing.
On markets, they say investors reacted by questioning whether the Fed might not cut at all this year, with pricing briefly implying no cuts and even, at one point, hikes. The guest still expects cuts in the second half of the year, while the host says that outcome would likely support U.S. Treasuries as a hedge and as a beneficiary of a slower economy.
Key takeaways
- Morgan Stanley now expects Fed cuts in September and December, not June and September, because oil and inflation risks are delaying confidence in disinflation.
- The guest says Powell signaled the Fed wants proof that tariff pass-through to core goods has ended before it will even consider looking through oil-driven inflation.
- The host says markets briefly priced a world with no cuts this year, and at one point after the FOMC meeting even priced hikes.
- The guest says the labor market is in balance but not dynamic, with payroll growth around 20,000 to 30,000 a month on average.
- The host argues U.S. Treasuries could perform well if slower growth and delayed Fed easing push rates lower later in the year.
Notable quotes
“We've slid those back to September and December”
“it will likely take the Fed longer to conclude that disinflation is occurring”
“what we have to do is get through this tariff pass through to core goods first”
“the press conference was dominated by fears or concerns around inflation, inflation expectations, and oil prices”
“the labor market's generally in balance low labor supply low labor demand”
How the episode opens
Welcome to Thoughts on the Market. I'm Matthew Hornbach, global head of macro strategy. — And I'm Michael Gapen, Morgan Stanley's chief US economist. — Today, the outcome of the March FOMC meeting and what it means for our economic and rates outlook for the rest of the year. It's Thursday, March 26th at 8:30 a.m. in New York. So Mike, as we expected, the Fed stayed on hold last week at the FOMC meeting and retained its easing bias, but what do you think the heightened macro uncertainty means for rate cuts this year?
Well, Matt, I think the answer is caution and probably rate cuts come later than earlier. So, we've changed our view on the back of the FOMC meeting. We previously thought rate cuts would come in June and September.
We've slid those back to September and December. The short answer here is I think with the rise in oil prices and at least some renewed upward pressure on headline inflation, it will likely take the Fed longer to conclude that disinflation is occurring. So, I think they need more time and that obviously means the Fed pushes rate cuts out.
Is there anything about the press conference that struck you as being interesting?
Yeah, I I think the almost near singular focus on inflation. So, after the meeting was over and the press conference was done, we did a little deep dive into the transcript because that's what we do as economists who who follow the Fed. And there were about 18 questions on inflation or prices.
There were only five on labor markets. And if you do kind of a word count on inflation and oil related terms, that would have popped about 200 answers. If you looked at labor market terms, you would have gotten about 40.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rate cuts timing
- oil prices
- tariffs
- inflation expectations
- market reaction
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