Federal Reserve Rate Cut Hopes Diminish Despite Dovish Remarks

Recent dovish remarks from Federal Reserve officials have sparked hopes for an interest rate cut. However, economists at Morgan Stanley have cautioned investors against getting their hopes up too high. They believe that investors will be disappointed with the outcomes of the Federal Reserve's next two policy meetings.

Despite pressure from the U.S. President and dovish comments from central bank officials, the Federal Reserve is unlikely to cut interest rates at its July and September FOMC meetings. The Federal Reserve's cautious stance on interest rate cuts this year has drawn strong opposition from the U.S. President, who has repeatedly called for a reduction of at least 2-3 percentage points. Over the past weekend, the President once again criticized the Federal Reserve Chairman, describing him as "terrible" and accusing him of artificially raising interest rates. The President suggested that interest rates should be reduced to half of their current level.

Several high-ranking Federal Reserve officials have expressed support for a rate cut in July. Unlike the "wait-and-see" approach led by the Chairman, the Federal Reserve Governor and the Vice Chairman for Supervision have both indicated their support for a July rate cut. They believe that tariffs may only temporarily boost inflation.

However, Morgan Stanley economists have advised against holding out too much hope. Their analysis focuses on two key factors. Firstly, they anticipate that short-term economic data releases will align with the Chairman's cautious stance. While the Chairman has reiterated the need to further assess the impact of tariffs, he has also expressed concerns about the reliability of economic data.

Morgan Stanley analysts wrote, "We expect inflation data to remain robust, showing more signs of being driven by tariffs in the summer. The upcoming employment report is also expected to be 'relatively stable,' and neither of these factors is likely to prompt the Federal Reserve to cut interest rates."

Secondly, they emphasized that despite recent dovish comments from the Federal Reserve Governor and the Vice Chairman for Supervision, the camp supporting a rate cut remains relatively small. These dovish remarks have fueled market hopes for a rate cut, with the market consensus now expecting three rate cuts this year, up from two previously.

The report stated, "Last week's economic projections summary (SEP) showed that seven policymakers do not expect a rate cut this year. In fact, the overall tone of last week's Federal Reserve officials' remarks was more in line with the Chairman's."

Morgan Stanley analysts pointed out that while uncertainty remains high and their predictions could be wrong, they believe that inflation data will rise later in the summer and may peak in July or August. "Our predictions align with the Chairman's expectations, which include tariffs driving up prices in the coming months," they added.