Morgan Stanley Says Fed to Cut Half a Percentage Point in July

(Bloomberg) -- Morgan Stanley sees the Federal Reserve cutting its key interest rate by half a percentage point this month, even after last Friday’s strong U.S. jobs report.

“A strong policy response is necessary to guard against risks of a further, sharper loss of economic momentum,” Morgan Stanley economists led by Chetan Ahya wrote in a note. Risks remain skewed to the downside and a significant hit to growth could emerge if financial conditions tighten, pushing corporate credit risks to the fore, they warned.

The call cuts against both the bigger-than-expected gain in payrolls for June, and the retreat in Treasuries it produced as traders pared back bets on an outsize rate cut at the Fed’s July 30-31 meeting.

“We continue to expect a quick and front-loaded adjustment” by policy makers to protect against downside risks, the Morgan Stanley team wrote. That means a 50 basis point cut this month, they wrote.

They made the call just before Chairman Jerome Powell delivers two days of testimony on the economic outlook and takes lawmakers questions at Congress on Wednesday and Thursday. Traders will be watching for any sign Powell is prepared to validate market expectations of easing; recent bets suggest 64 basis points of cuts this year, down from around 80 basis points two weeks back.

“We expect the policy-easing cycle to move into full swing and expect a stronger policy response from central banks than what markets and consensus currently expect,” the Morgan Stanley economists wrote. They said they see greater odds of the European Central Bank restarting quantitative easing than the consensus view.

To contact the reporter on this story: Enda Curran in Hong Kong at ecurran8@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Christopher Anstey, Karthikeyan Sundaram

©2019 Bloomberg L.P.