Morgan Stanley joins peers in pushing back Fed cut forecasts on inflation fears

Electronic signs are shown at Morgan Stanley headquarters in New York. (AP Photo/Mark Lennihan)

Morgan Stanley on Thursday joined Goldman Sachs and Barclays in pushing back its forecast for the U.S. Federal Reserve’s next interest rate cut to September from June after the central bank flagged inflationary risks amid the Middle East conflict.

The Wall Street brokerage now expects quarter-point reductions in September and December, revising its earlier forecast of reductions in June and September.

“In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” Fed Chair Jerome Powell said in a press conference after the central bank kept interest rates unchanged on Wednesday.

New projections show that Fed policymakers as a group anticipate the Federal Open Market Committee will cut the policy rate by a quarter percentage point before the end of the year, while major Wall Street firms still expect two rate cuts.

“A cautious Fed means delay. The primary risk to our view remains that rate cuts come later or not at all,” Morgan Stanley strategists said in a note.

“In the other direction, a second-round surge in oil prices could mean activity and labor markets weaken, prompting cuts.”

Oil prices have climbed above US$100 a barrel due to the ongoing Middle East conflict that has led to the closure of the Strait of Hormuz, a key trade route that handles almost a fifth of the global oil trade.

Traders are currently pricing in over a 70 per cent chance that the U.S. central bank will hold rates steady in September, according to the CME FedWatch tool.

(Reporting by Kanchana Chakravarty in Bengaluru; Editing by Sonia Cheema and Saumyadeb Chakrabarty)