Morgan Stanley doesn’t expect the Fed to pull off any surprises this week, keeping monetary policy unchanged. However, there could be some light changes to the statement but overall the firm expects the central bank to reaffirm a more easing bias.
For some context, their call fits very well with market expectations as Fed funds futures show ~97% odds of no change to rates this week. The next full 25 bps rate cut is only priced in for July with odds of it being in June sitting at ~75% currently.
Given the backdrop and market pricing, Morgan Stanley argues that there is only one key question to navigate through in this week’s meeting. And that will be whether Powell & co. will keep a more explicit dovish bias in their communique or hint at a more prolonged pause?
“We expect the Fed to remain on hold at its January meeting, keeping the target range for the federal funds rate at 3.5-3.75%. The Fed initiated bill purchases to keep reserve balances at “ample” levels. We expect that policy to be maintained in January with no additional changes. In the statement, we expect the Committee to upgrade its assessment of growth and remove the wording around downside risks to the labor market having risen. We expect the “extent and timing of additional adjustments” language to stay, signaling a continued easing bias. The key question at this meeting will be how Powell communicates the pause: is it a “dovish hold” in which he continues to emphasize that the outlook supports further rate cuts, or will Powell signal a more durable pause? We expect the former.”
