Morgan Stanley analysts believe the Federal Reserve’s recent 50 basis point (bp) rate cut does not signal a significant change in its reaction function and will have limited impact on other global central banks.
They note that while the Fed’s move was designed to show its commitment to staying ahead of inflation risks, the general expectation remains a series of 25bp cuts going forward.
According to Powell, the Fed is still confident in the economy’s health and labor market, with further cuts depending on upcoming data like payrolls and consumer spending.
The Morgan Stanley note emphasizes that the global central banking response will continue to be influenced by domestic conditions.
For example, Brazil’s central bank recently hiked rates due to strong growth and a weaker currency, both signaling inflationary pressures.
Conversely, Morgan Stanley says Indonesia’s central bank cut rates after its currency appreciated, reducing inflation risks.
These examples are said to show how emerging markets balance global financial conditions with local economic factors.
In developed markets, Morgan Stanley analysts expect little immediate reaction to the Fed’s move.
In Europe, the European Central Bank (ECB) is expected to continue its cautious approach, with another cut likely in December.
The Bank of England (BoE), which paused rate cuts in September due to inflation concerns, is projected to resume cuts in November. The Bank of Japan (BoJ), meanwhile, is likely to hold steady until early 2024.
While the Fed’s 50bp cut hints at potential large shifts in the future, Morgan Stanley stresses that it does not indicate a fundamental strategy change.
The easing cycle is still viewed as positive for risk assets, but uncertainties remain, particularly around the upcoming U.S. election and its potential effects on 2025 forecasts.