Federal Reserve To Follow European Bank's Footsteps, Likely To Cut Rates In September Amid Falling Inflation, Morgan Stanley Predicts

The U.S. Federal Reserve and the European Central Bank (ECB) are expected to cut interest rates in September. This forecast comes from Morgan Stanley, who have analyzed key data pointing towards a deceleration in inflation in both the U.S. and the eurozone.

What Happened: Andrew Sheets, Managing Director and Head of Cross-Asset Strategy at Morgan Stanley has voiced his optimism about the likelihood of concurrent rate cuts, CNBC reported on Friday. This follows the recent consumer price index (CPI) and labor market data in the U.S. and Europe.

“We’re more optimistic that both the Fed and ECB will cut rates in September,” Sheets told CNBC’s “Squawk Box Europe.”

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Earlier this month, the two central banks displayed signs of diverging monetary policies. The ECB implemented its first interest rate cut in nearly five years, while the Fed maintained that U.S. inflation was too high for a similar move. Sheets thinks that by September, data will reveal a moderation in inflation in the eurozone and a continued decline in the U.S.

"It's understandable that these central banks don't want to pre-commit. They don't want to sound overly complacent about the risks of inflation," Sheets said.

"But we think the data that the ECB will see by September is inflation [is] continuing to moderate. And I think, for the Fed, inflation is continuing to fall," he added.

A Reuters poll of economists predicts a Fed rate cut from the current range of 5.25% to 5.50% this September, with another reduction expected later in the year. The ECB is also expected to lower rates in September and December.

Why It Matters: This came after Mohamed El-Erian, the chief economic adviser at Allianz, suggested that the Federal Reserve should consider a rate cut in July. However, he expressed skepticism about the likelihood of this happening.

In a recent opinion piece, El-Erian emphasized the need for the Fed to act swiftly in reducing interest rates to prevent potential economic instability.

Federal Reserve Gov. Lisa Cook also recently recommended the Fed lower its interest rate, though she did not specify when this should happen.

Meanwhile, U.S. Treasury Secretary Janet Yellen has expressed confidence in the American economy, dismissing the possibility of a recession and predicting that inflation will reach the Federal Reserve’s 2% target by next year. This contrasts with El-Erian's concerns about the pace of inflation and the potential impact on the economy.

Read Next: Janet Yellen Says ‘Inflation To Come Down’ To ‘Fed’s 2% Target’ By 2025, Dismisses Possibility Of US Recession

Image via Federal Reserve

This story was generated using Benzinga Neuro and edited by Pooja Rajkumari