Morgan Stanley Chief Economist Speaks: “FED Returned to a Hawkish Stance Today, However…”

Michael Gapen, Chief US Economist at Morgan Stanley, said that although the FED’s current stance seems hawkish, he does not rule out a switch to a more dovish approach in the near future. Speaking after the release of the latest Personal Consumption Expenditures (PCE) report, Gapen drew attention to the main trends in inflation and the FED’s potential policy trajectory.

The November PCE report, which showed a modest increase of 0.1, was evaluated positively by Gapen. He noted that the decline in housing-related inflation was an important factor and that progress had been made in addressing one of the root causes of high inflation. However, due to storm-related disruptions, some persistence continues in commodity prices, especially in the automobile sector.

“The data shows that inflation is falling,” Gapen said, adding that more confirmation would be needed for the FED to consider reducing interest rates as early as March.

Gapen predicts that December inflation figures may show a similar outlook, with an increase between 0.17% and 0.2%. However, January may show a seasonal increase. Despite these fluctuations, he sees a clear trend towards disinflation, which could influence the Fed’s future decisions.

Although the FED has maintained its hawkish tone recently, Gapen believes that this stance is not stable. He pointed to comments from Chairman Jerome Powell that monetary policy, while remaining restrictive, was less restrictive than in previous months.

“There is too much inflation tolerance in their forecasts,” said Gapen, stating that the FED does not expect to reach the 2% inflation target until 2027 and added: “If activities slow down, inflation falls and labor markets soften, the FED may return to a more dovish approach.”

*This is not investment advice.