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Investing.com - An upward revision to second-quarter U.S. growth figures should not dissuade the Federal Reserve from rolling out further interest rate cuts this year, although the chances of a half-point drawdown before the end of the year have likely been reduced, according to analysts at Morgan Stanley.
In a note, the bank argued that "risk-management" rate cuts are "still coming," referring to comments from Fed Chair Jerome Powell earlier this month.
Powell argued at the time that a 25-basis point reduction at the Fed’s September meeting aimed to address the twin pressures of stubbornly elevated inflation and cooling employment activity. Theoretically, cutting rates can help spur investment and hiring, albeit at the risk of pushing inflation higher.
On Thursday, hot economic data appeared to bolster a slightly more hawkish view of borrowing costs over the remaining months, with the rate-sensitive 2-year U.S. Treasury yield in particular edging higher.
Among the slew of figures was a revised reading of second-quarter U.S. gross domestic product. The indicator of growth in the world’s biggest economy expanded by 3.8% during the April to June period, according to the third and final estimate from the Commerce Department’s Bureau of Economic Analysis.
A prior estimate had suggested that the U.S. economy grew by 3.3%, after contracting by 0.5% in the first quarter. The first estimate showed growth of 3.0%.
The updated measure, which was driven in large part by an uptick in household spending, was also joined by a decline in weekly first-time claims for unemployment benefits.
In the wake of the numbers, traders were placing a roughly 88% chance of a 25-basis point rate cut at the Fed’s next gathering in October and a 62% probability of a similar drawdown in December, according to CME’s FedWatch Tool.
The Morgan Stanley analysts led by Michael Gapen said they continue to expect a "modest slowdown" in the U.S. economy "before recovery," adding that "[r]educed hiring and firmer inflation has caused growth in real aggregate labor income to slow rapidly."
Against this backdrop, they project that the Fed will cut rates in October and December. However, they noted, "if there is risk to our baseline outlook for monetary policy, we think it more likely to alter our expectations for three rate cuts in 2026 in the direction of fewer cuts."