Investing.com — The Federal Reserve's stance on interest rate cuts has changed, with restrictive trade and immigration policies playing a key role in delaying further easing, according to Morgan Stanley (NYSE:).
While the Fed recently enacted a 25 basis point rate cut, its forward guidance has become “decidedly hawkish in favor of just two rate cuts in 2025, down from four previously,” the bank said.
Morgan Stanley notes that the Federal Reserve is now prioritizing inflation concerns over labor market risks, with Chairman Powell acknowledging that “uncertainty about the outlook for inflation had increased and risks around inflation were weighted to the upside.” ”.
The persistence of inflation, driven in part by higher tariffs and lower immigration, is said to underscore the Fed's cautious approach.
“Restrictive trade and immigration policies can keep inflation firm and delay further rate cuts,” Morgan Stanley said.
The bank explains that a gradual increase in tariffs on Chinese imports and a sharp decline in immigration (from 1 million in 2025 to just 500,000 in 2026) are expected to help core PCE inflation remain stable at 2.5 % next year.
These policies are also expected to affect economic activity over time; Morgan Stanley forecasts that real GDP growth will slow to 2.0% or less in 2025.
Despite the tough near-term outlook, Morgan Stanley believes this could change as the lagging effects of restrictive policies further slow growth.
Drawing parallels to December 2018, Morgan Stanley highlights how the Federal Reserve shifted from a hawkish stance to rate cuts as economic activity slowed under similar conditions.
“The Federal Reserve may be hawkish today—concerned about persistent inflation and political uncertainty—but it will become dovish tomorrow, particularly if those same policies weigh on economic activity and labor markets over time,” the analysts wrote. .
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