Investing.com – In the wake of the minutes from the Federal Reserve’s (Fed) July meeting that showed a divided opinion among policymakers on when the next move should be, Morgan Stanley identified what they consider to be key for the next rate hike.
In a report released early Thursday, the firm pointed out that the U.S. central bank has placed less emphasis on the labor market.
“When the FOMC (Federal Open Market Committee) was debating when to lift off, it concluded that it needed to see ‘some further improvement in the labor market’ and be ‘reasonably confident that inflation will move back to its 2% objective over the medium term,’” these analysts said, but added that was a thing of the past.
“From that point, emphasis shifted to the inflation outlook, as has been suggested by the FOMC statement ever since: ‘In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal,’” they noted.
“We think inflation holds the key to further Fed rate hikes,” these experts explained.
Furthermore, they pointed to the fact that core PCE (personal consumption expenditures) inflation was at 1.6% in June, well below the Fed’s 2% target, and forecast that it will drop to 1.5% in July. The data will be released on August 29.
“If we are right (…), the market should take a September hike off the table and adjust lower the probability of a December hike accordingly,” these analysts concluded.
They specified that markets will likely reduce the current probability of about 50% for a rate hike in December to 30% over the coming five weeks.