Federal Reserve rate cuts "unlikely" in the near term, Morgan Stanley says

Investing.com - The Federal Reserve is unlikely to slash interest rates at its next two meetings in July and September, according to analysts at Morgan Stanley (NYSE:MS), who added that a majority of officials at the central bank have aligned behind Chair Jerome Powell’s cautious policy stance.

In a note to clients, the brokerage argued that the flow of incoming economic data will continue to be "consistent" with the Fed’s recent wait-and-see approach to rates.

"We expect firmer inflation prints showing more signs of a tariff push over the summer. And we see relatively solid upcoming employment reports, with slowing employment gains but no signs of crack that would put the Fed in a hurry," the analysts said.

The comments come after Powell largely suggested during Congressional testimony this week that there was no need to rush out interest rate reductions, especially with the impact of President Donald Trump’s sweeping tariff agenda possibly set to start showing up in upcoming inflation data.

Powell, along with other economists, have flagged concerns that the levies could refuel waning price gains and dent broader activity. Although figures have pointed to a contraction in the U.S. economy in the first quarter and an elevated number of Americans claiming unemployment benefits, inflation has stayed mostly benign.

Given these trends, recent commentary from some Fed officials have indicated that not all rate-setters share Powell’s view. Fed Governors Michelle Bowman and Christopher Waller have both mentioned this week that they are open to rate cuts as early as July if they do not see more evidence of emerging price growth. The statements drove bets of a drawdown next month, though markets widely anticipate that the cut may not come until September.

Yet these near-term reductions are not seen as likely by the Morgan Stanley analysts.

"Negative payroll prints, rising unemployment, and subdued inflation could trigger a sooner cut," they wrote, but flagged that this is "not our base case."