Morgan Stanley Sees Two Fed Hikes and ECB Move Amid Persistent Inflation

Morgan Stanley has revised its interest rate forecast to reflect a more hawkish outlook. The bank now expects two Federal Reserve hikes this year, in addition to an increase from the European Central Bank in December.

The Fed is set to meet on September 15-16, and investors are expecting a quarter-point hike after recent inflation readings came in above expectations. Morgan Stanley believes that the disinflation process has been slower than policymakers anticipated, prompting its forecast for two rate hikes this year.

In a note published on Monday, the bank stated that while there are arguments both for and against a rate increase, signs of second-round effects from energy prices, strong demand tied to AI-related investment, a temporarily higher neutral rate, and concerns about credibility argue in favor of a somewhat more restrictive policy.