Author:Zhao Ying
The policy stance of the new Federal Reserve Chairman, Wash, is undergoing close market scrutiny. Seth Carpenter, Chief Global Economist at Morgan Stanley, noted in a report after attending the European Central Bank's Sintra Forum in Portugal that, based on employment data, inflation forecasts, and policy signals, the Federal Reserve will not raise interest rates this year.
Carpenter wrote in the report that Wash's remarks at the Sintra policy forum maintained the tone of his inaugural press conference—a strong commitment to price stability but deliberately avoiding specific details on the path to achieve it. Carpenter noted two noteworthy changes:
First, Wash's wording on the dual mandate has become more balanced, shifting from an almost singular focus on inflation to a clearer acknowledgment of the full employment objective.
Second, Wash specifically emphasized that the most recent policy meeting (combined with falling oil prices) has already lowered market inflation expectations and term premiums. This statement led Carpenter to believe that a July rate hike by the Fed is unlikely.
Against the backdrop of uncertainty regarding the Fed's policy path, Morgan Stanley maintains its base case forecast of no rate hikes for the year, suggesting the market need not price in imminent rate hike risks.
Wash's Sintra Signals: Balancing the Dual Mandate, Downplaying Rate Hike Urgency
Carpenter was present for Wash's Sintra forum speech and interpreted it as a marginally dovish shift. He pointed out that Wash had previously left the market with the impression that price stability was an overwhelming priority, whereas this speech more clearly incorporated the full employment goal into the policy framework.
More crucially, Wash proactively pointed out that the policy meeting had already pushed market inflation expectations and term premiums lower, and mentioned that multiple 'working groups' are being formed and will take time. Carpenter believes this combination of wording sends a clear signal: the Fed is in no rush to act in July.
Data Supports Patience: Inflation Forecasts Below FOMC Median, Nonfarm Payrolls Provide Buffer
On the fundamental level, Carpenter cited several factors supporting the no-rate-hike forecast. Last week's nonfarm payroll data continues to provide room for the Fed to stand pat. Meanwhile, Morgan Stanley's inflation forecast is significantly below the median forecast of FOMC members, and there is the possibility of a further substantial downward revision to inflation readings due to methodological changes in PCE inflation.
Carpenter stated that the combination of the above factors makes him feel 'comfortable' with sticking to the judgment of no rate hikes for the year. Data could of course change the conclusion, but current evidence points in the same direction.
AI and Productivity: Not a Simple Bet for Rate Cuts
Carpenter also discussed the impact of artificial intelligence on monetary policy and challenged the popular narrative that 'AI will bring deflation and drive rate cuts.' He pointed out that the wave of AI capital expenditure has emerged earlier and on a larger scale in the United States, exerting a marginally inflationary effect in the short term.
More importantly, he offered three counterarguments: First, the state of the business cycle will dominate the policy direction. Second, the deflationary effect is just one of many impacts; higher productivity can also boost demand through consumption and investment. Third, faster productivity growth implies a higher equilibrium interest rate (what economists call r*), further weakening the logic for rate cuts. Carpenter bluntly stated that the simplistic argument that AI inevitably leads to rate cuts is 'almost certainly wrong.'
Diverging ECB Path: Possibly Another 25 Basis Points in September, but Soft Data Leaves Room for Variation
In contrast to the Fed, the European Central Bank's policy direction is more clearly biased towards tightening. Carpenter noted in the article that ECB President Lagarde reiterated in Sintra that the June rate hike was a well-considered decision, not merely a 'precautionary hike.' In his view, this wording implies there is room for further rate hikes.
Morgan Stanley's base case forecast is for the ECB to raise rates by another 25 basis points in September. However, Carpenter also noted that last week's soft European inflation data and the sharp drop in oil prices leave room for policy maneuver—if inflation continues to soften or PMIs show significant weakness, the path to another rate hike could be blocked. He believes that a rate hike in July or more than one hike this year are both difficult to imagine at this point.
