Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on November 01, 2023 at the Federal Reserve in Washington, DC. The Federal Reserve left interest rates unchanged at a range of 5.25 percent to 5.50 percent, keeping rates the highest they have been in 23 years.Kevin Dietsch/Getty Images
Ideally the Fed will cut rates by a half-point without triggering growth worries, Morgan Stanley says.
CIO Mike Wilson noted that the bond market is acting like the Fed is behind the curve.
He said defensive and quality stocks are worth owning after the rate cut on Wednesday.
Wall Street is bracing for a pivotal interest-rate-cut announcement on Wednesday, and there’s still uncertainty around how far the Federal Reserve will go.
As of Monday morning, the CME FedWatch tool showed the market is pricing in a 59% chance of a 50-basis-point cut. According to new research from Morgan Stanley, that would be the best possible outcome for stocks. But there’s a caveat: it has to cut a half-point and keep the market from worrying about economic growth.
“In the very short-term, we think the best case scenario for equities this week is that the Fed can deliver a 50bp rate cut without triggering either growth concerns or any remnants of the yen carry trade unwind—i.e., purely an “insurance cut” ahead of macro data that is assumed to stabilize,” chief investment officer Mike Wilson wrote in a Monday note.
In the months leading to the Federal Reserve’s policy meeting this week, deteriorating labor data has persuaded investors that the central bank needs to start reducing borrowing costs to avert an economic cooldown.
In Morgan Stanley’s view, the Fed might want to cut by 50 basis points, as the bond market indicates that monetary policy is behind the curve: if interest rates stay for higher for longer, they risk rupturing something in the economy.
At the same time, some analysts have noted that an aggressive cut could be the Fed’s way of acknowledging trouble in the economy.
Ahead of the rate cut, Morgan Stanley suggested that…
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