The latest geopolitical conflicts in the Middle East have triggered a surge in oil prices, leading to a general cooling of expectations for interest rate cuts by major central banks in global financial markets. However, Wall Street financial institution Morgan Stanley (MS) is sticking to its forecast, believing that the Federal Reserve will resume rate cuts in June.
“We still hold to the judgment that the Fed will cut rates in June and September,” Michael Gapen, Chief US Market Economist at Morgan Stanley, said at a meeting in New York on Monday. “Of course, the risk is that it could indeed be pushed back further.” This stance stands in stark contrast to the prevailing pricing in the current interest rate futures market. As rising oil prices could rekindle inflation and hinder central banks from easing monetary policy, market participants have significantly reduced their bets on rate cuts. According to the CME FedWatch Tool, traders now generally predict only one rate cut this year, with the timing pushed back from the first half of the year to September.
Interest rate futures linked to the Fed’s policy rate indicate that the market expects just one 25-basis-point rate cut by December this year, with the probability of a cut in September standing at about 60%. This expectation has cooled significantly compared to last month, when the market had anticipated at least 50 basis points in cuts. Several institutions, including Goldman Sachs (GS), TD Securities (TD), and Barclays (BCS), have also delayed their expected timing for the first rate cut from June to September. Gapen pointed out that if the Fed postpones the first rate cut until September or even December, the next window for a cut could potentially be pushed back to 2027.
Alongside the surge in oil prices, recent US inflation data also shows that price pressures remain stubborn. This has intensified market concerns about the economy slipping into “stagflation” (a situation characterized by stagnant economic growth coexisting with inflation). Such concerns have already roiled global markets. The yield on the 10-year US Treasury note, often dubbed the “anchor for global asset pricing,” has recently risen sharply as a result. The yield on the policy-sensitive 2-year US Treasury note once climbed to near 3.75%, reaching a notably high level.
Seth Carpenter, Global Chief Economist at Morgan Stanley, believes that the surge in inflation driven by oil prices might be temporary. “If the situation deteriorates to the point where it starts to impact economic growth,” he said, “then over time, this could actually further depress the underlying inflation trend, especially core inflation.”
This week, several major central banks, including the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan, are scheduled to announce their interest rate decisions in quick succession. Their remarks on monetary policy and future economic trends will become the focal point of market attention.
