Morgan Stanley: Fed Focuses on Labor Market, Will Continue to Cut Rates in November

The chief investment officer of Morgan Stanley Wealth Management said the Federal Reserve will continue to cut interest rates in November but policymakers are being cautious as inflation is no longer accelerating. Lisa Shalett said the Fed is focused on the labor market, with evidence that it is "mixed." "They are not going to pursue the 2% (inflation) target; they have given up," she said. Most Fed policymakers last week signaled further rate cuts in the coming months, while Atlanta Fed President Raphael Bostic said a pause in November was possible. "Markets have not yet realized this, but as higher inflation expectations are digested, the bond market seems to be starting to show a rebound from a longer-term perspective," Shalett said. Data released last week showed US consumer price inflation in September rose slightly more than expected, while producer price inflation was flat. Traders now see a 89% chance the Fed will cut rates by 25 basis points at its Nov. 6-7 policy meeting, abandoning expectations for a 50 basis point cut after the September jobs report and other upbeat economic data. At the same time, Shalett said she expects no clear outcome on Nov. 3, the day of the US presidential election, given the evenly matched parties. Polls last week showed Democratic vice presidential nominee Kamala Harris and former Republican president Donald Trump were neck and neck in seven battleground states. "We are encouraging clients to anchor their positions in what we call real assets ... including gold, commodities, real estate, energy infrastructure assets," to "hedge" against increasing market volatility, she said. "We also favor market-neutral hedge fund strategies," she added.