LIVE MARKETS-Morgan Stanley sees Fed keeping March rate cut on table

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MORGAN STANLEY SEES FED KEEPING MARCH RATE CUT ON TABLE

Federal Reserve Chairman Jerome Powell is likely to express confidence that inflation will continue to ease when he speaks at next week’s FOMC meeting, which should keep the prospect of a March interest rate cut alive, according to economists at Morgan Stanley.

December’s stronger than expected employment report has likely eased concerns that the labor market is cooling faster than was preferable, but moderate inflation for November was the most important data during the intermeeting period, Morgan Stanley said.

The bank expects December core PCE to rise by 0.17% on the month, and if correct “we think market-based measures of inflation will give the Fed confidence that inflation is still converging to the 2.0% target.”

The risk to the rate outlook is U.S. government policy changes including tariffs, as well as an unexpected increase in inflation, Morgan Stanley said.

A gradual implementation of tariffs as inflation also moves lower would allow the Fed to cuts rates, though the bank noted that “it is hard to have strong conviction about the policy rate path at present.”

Earlier and more aggressive tariffs could lead Morgan Stanley to project fewer cuts in the first half of the year, shift them to later in the year or remove them from its forecast for this year.

For now, however, interest rate strategists at the bank recommend positioning for a March rate cut by maintaining a long position in five-year Treasury notes at a yield of 4.43%, with a target of 3.75% and a stop loss at 4.50%. US5YT=RR

(Karen Brettell)

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