FOMC statement will open the door to a September cut: Morgan Stanley

Morgan Stanley (NYSE:MS) analysts anticipate that the Federal Reserve's upcoming July meeting will pave the way for a rate cut in September.

They believe the Federal Open Market Committee (FOMC) will highlight significant progress in combating inflation and acknowledge rising risks in the labor market, which will signal a readiness to lower interest rates.

The analysts expect the FOMC to maintain the current interest rate at 5.375%. They predict that the FOMC statement will reflect improvements in inflation and labor market conditions, with Chair Powell likely to emphasize increased confidence in achieving the Fed's inflation targets.

According to Morgan Stanley, "Considerable progress on inflation allows the Fed to inch closer to rate cuts. Chair Powell should emphasize increased confidence."

In their preview, Morgan Stanley notes, "We continue to look for three cuts this year starting in September." They expect Powell to indicate that the Fed is nearing a decision to lower rates, without committing to a specific timeline for future cuts.

Morgan Stanley's analysis suggests that recent inflation data supports this outlook. They state, "Core PCE inflation has eased considerably over the past year, and though progress flattened out in 1Q24, disinflation resumed in the second quarter."

The analysts forecast a 0.18% increase in June's core PCE, further supporting their view of an impending rate cut.

Furthermore, they anticipate a more balanced view from the Fed regarding risks to the economy and labor market. "Chair Powell and the FOMC have highlighted that risks to the outlook – on both growth and the labor market – are more two-sided now," Morgan Stanley points out.

In conclusion, the bank believes that the upcoming FOMC meeting will set the stage for a rate cut in September, reflecting confidence in the progress made on inflation and a cautious approach to labor market conditions.