Morgan Stanley turns more hawkish, forecasts two Fed hikes and ECB move

Morgan Stanley has joined other major Wall Street banks in adopting a more hawkish outlook on interest rates, forecasting U.S. Federal Reserve rate hikes and another European Central Bank increase later this year as inflationary pressures persist.

The forecasts come ahead of policy decisions from the U.S. Fed and the Bank of Japan this week, days after the ECB resumed its tightening cycle, keeping global markets focused on the outlook for interest rates.

Morgan Stanley expects the Fed to raise interest rates by 25 basis points at its September 15-16 meeting and deliver another quarter-point increase in December after recent inflation readings came in above expectations.

In a note on Monday, the brokerage said the disinflation process has been "slower and less convincing" than policymakers are likely to require, prompting it to forecast two rate hikes this year.

It also expects the U.S. central bank to signal further tightening before officials pause as inflation moderates.

"We see arguments for both a hike and a hold, but signs of second-round effects from energy prices, strong demand tied to AI-related investment, a neutral rate that is possibly temporarily higher, and concerns about credibility mean the balance of risks now argues for a somewhat more restrictive policy," the brokerage added.

Kevin Warsh, who took over as Fed chair in May, has repeatedly avoided offering guidance on the likely path of U.S. interest rates.

But with inflation running above target, oil prices trading above $100 a barrel and financial markets overwhelmingly pricing in a rate increase, investors see this week's meeting as likely to deliver the first rate hike of his tenure.