Morgan Stanley: The Fed's Short-Term Policy Won't Shift Suddenly; Balance Sheet Reduction Likely to Wait Until Next Year

Morgan Stanley recently released an analysis indicating that despite market speculation about a policy shift following the nomination of the new Federal Reserve Chair, the plan to reduce the balance sheet (balance sheet shrinkage) is unlikely to become a substantive agenda until at least next year.

The report notes that Fed policy decisions are not solely driven by individual will but are the result of a complex process collectively agreed upon by the Federal Open Market Committee (FOMC).

Although the new Chair Kevin Warsh has expressed concerns about the large balance sheet, any significant policy change would require broad consensus within the committee, which is not achievable overnight.

Therefore, even if Warsh favors accelerating policy normalization, internal coordination constraints mean that substantive discussions and actions regarding balance sheet reduction will remain difficult in the short term, and the likelihood of a rapid policy shift is low.

Additionally, regarding market concerns about the outlook for rate cuts, Morgan Stanley maintains a cautious baseline expectation. The bank believes there could be two rate cuts in the second half of this year, but this depends strictly on whether inflation can clearly return to a downward trajectory.

The report emphasizes that if data shows the labor market remains strong, consumer spending stays robust, and inflation remains sticky, the Fed may choose to keep interest rates unchanged for the rest of the year.

In simple terms, the primary drivers of the Fed's future interest rate policy will continue to be core economic data such as inflation and employment, rather than personnel changes.

The analysis concludes that any genuine policy shift will be gradual and highly data-dependent. Even if adjustments occur in the future, they are expected to first manifest in the balance sheet rather than in the benchmark interest rate.

This relatively cautious outlook not only provides a mild "rate cut" expectation for potential market shifts but also underscores the continuity and stability of monetary policy in a complex environment.

#摩根士丹利 #Federal Reserve Policy