Fed Rate Hikes May Be Overestimated, Morgan Stanley and Bank of America Warn

Morgan Stanley and Bank of America are cautioning investors against overestimating the Federal Reserve's rate hikes. According to their latest reports, the market is experiencing a 'perfect storm' that is pushing Treasury yields higher, but the magnitude of future rate hikes may be exaggerated.

The Fed's base case remains that it will hike rates twice more, bringing the cumulative increase this cycle to 75 basis points, and hold rates at that level through the end of 2027. However, under a more hawkish scenario, the cumulative hike could reach approximately 150 basis points.

Economic fundamentals remain relatively strong, with Morgan Stanley maintaining its tracking estimate of 2.5% annualized US GDP growth for the third quarter. However, energy risks are the core factor limiting the Fed's room to turn dovish.