Morgan Stanley: What we expect from the January FOMC

Morgan Stanley anticipates the Fed will hold rates steady at the January meeting while upgrading its assessment of the labor market. Chair Powell is expected to emphasize data dependence and policy uncertainty, leaving the door open for a potential rate cut in March.

Key Points:

• Labor Market Upgrade:

  • The Fed is likely to revise its characterization of the labor market from “cooling” to “stable,” reflecting recent sideways trends in payrolls over the last 6-9 months.

• Inflation and Policy Stance:

  • Chair Powell is expected to highlight ongoing progress on inflation and reaffirm that monetary policy remains at an appropriately restrictive level.

• March Rate Cut Possibility:

  • Powell may stress data dependence and leave open the possibility of a March rate cut, citing uncertainty in the economic outlook and confidence in continued inflation declines.

• Balance Sheet Policies:

  • The Fed is expected to discuss balance sheet policies in depth, potentially signaling that an end to the balance sheet runoff is near.

Conclusion:

Morgan Stanley projects no rate change at the January FOMC meeting but expects upgraded labor market language and a focus on inflation progress. The Fed may hint at a March cut while signaling a shift in balance sheet policies, adding nuance to its monetary stance.

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This article was written by Adam Button at www.forexlive.com.