What to know:
- Morgan Stanley says Fed hikes remain possible if inflation or labor data strengthens.
- BNP Paribas expects three Fed hikes as inflation and employment risks remain firm.
- Markets price a 52% Fed hike chance as traders watch inflation, jobs, and Fed remarks.
Morgan Stanley said the Federal Reserve may still raise interest rates this year if inflation stays elevated or the labor market gains strength, although the bank still expects policy to remain unchanged through 2026.
According to the report, the bank’s base case remains unchanged and points to no additional policy action this year. However, it added that the Fed’s path could shift if economic data strengthens. The warning keeps rate-hike risk in focus for investors.
Morgan Stanley pointed to two situations that could drive another hike. Labor-market strength would be indicated by a decline in the unemployment rate to below 4%. If inflation continues to remain above the Fed’s target, it will put pressure on policymakers.
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Morgan Stanley Holds Rate View as Inflation Pressure Grows
The concern comes amid new inflation figures. The U.S. Personal Consumption Expenditures price index increased to 4.1%, the highest level since 2023. The reading put more heat in the argument as to whether current interest rates are sufficiently high to curb inflation.
Morgan Stanley is still forecasting that the Fed will keep rates unchanged. Lower oil prices after the U.S.-Iran peace agreement could ease energy-driven inflation. That move could affirm the bank’s stance that a further rate hike is unlikely.
Other institutions have taken a more hawkish position. BNP Paribas lowered its previous steady-rate projection and is now forecasting a three-rate hike by the Federal Reserve in 2025. It forecasted three consecutive rate increases from the December policy meeting.
BNP Paribas noted inflation and strong employment could lead officials to remove some of the previous stimulus. It also forecasts unemployment will head towards 4% by year-end. That would leave more room for the Fed to keep inflation on track rather than provide support for the job market.
FOMC Split Shows Fed Hike Debate Remains Open
Federal Reserve officials have also signaled risk to tighter policy. Minneapolis Fed President Neel Kashkari told Bloomberg that he was one of those who had expected a rate hike this year. He said that inflation was continuing in the economy.
The June FOMC forecasts were split. Nine out of 18 officials predicted at least one rate hike this year. Six of them forecasted more than one hike.
Markets also remain pricing a potential rate hike. Polymarket data showed a 52% chance that the Federal Reserve raises rates this year.
CME FedWatch data shows traders betting on hikes in September, October, and December. During the September meeting, the odds of a rate hike were 46.8%.
That pricing shows traders are not treating the Fed’s pause as certain. The next move in expectations will be led by inflation reports, jobs data, and Fed comments.
Morgan Stanley is less aggressive than BNP Paribas. But the bank indicated that stable rates are dependent on a slowdown in inflation and labor market conditions. If the economic data are stronger, the Fed may have little leeway in avoiding a second rate hike.
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