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Investing.com -- The Federal Reserve has been in a cutting cycle, but recent discussions have raised the possibility of a rate hike, according to Morgan Stanley (NYSE:MS) analysts.
However, the bank views such a move as unlikely due to the "very high" bar required for the Fed to shift gears.
In a note Monday, Morgan Stanley said it expects the Fed to continue reducing rates, albeit at a slower pace, as long as disinflation persists.
The firm forecasts “one or two more cuts in the first half of the year,” with last week’s CPI data supporting this outlook.
While inflation fears linked to tariff and immigration policies remain, the bank believes “concerns that inflation is rising should surely have been allayed.”
The prospect of a hike is said to be complicated by how central bankers approach policy.
As Morgan Stanley notes, the Federal Open Market Committee (FOMC) tends to focus on the level of rates rather than changes in rates. December FOMC minutes revealed that a “substantial majority” of participants considered the current federal funds rate to be “meaningfully restrictive.”
This suggests policymakers believe existing rates are sufficient to continue exerting downward pressure on inflation.
Morgan Stanley emphasizes that moving from rate cuts to hikes would require a major shift in the Fed’s outlook.
“If the Fed concluded they need to hike, it would likely start a series of hikes,” the analysts wrote. However, such a conclusion would demand “several months of accumulated data” showing inflation is persistently rising and policy is no longer neutral.
For now, Morgan Stanley remains aligned with the consensus view: rate cuts are more likely in the near term, and the leap to a hike remains a “big” and improbable step without substantial evidence.