Federal Reserve (Fed) Chair Kevin Warsh’s policy direction is becoming the focal point of global financial markets. Morgan Stanley’s Chief Global Economist Seth Carpenter, after personally attending the European Central Bank’s (ECB) annual forum on central banking in Sintra, Portugal, delivered a very clear judgment: the Fed will not hike interest rates this year.<\/p>\n
In his newly released report, Carpenter noted that Warsh’s remarks in Sintra continued the tone set at his inaugural press conference, showing a strong commitment to price stability while deliberately avoiding the specific path to achieving that goal. However, from his close-range observation, Carpenter captured two subtle shifts worthy of market attention.<\/p>\n
First, Warsh’s expression of the “dual mandate” has become significantly more balanced. Carpenter analyzed that Warsh previously gave the impression of treating the fight against inflation as the overwhelming priority, but this time his remarks more clearly incorporated the “maximum employment” goal into the policy framework. Second, Warsh specifically pointed out that the results of recent policy meetings, combined with falling oil prices, have successfully suppressed market inflation expectations and term premiums. Carpenter interprets this combination of phrasing as sending a clear signal: the Fed is in no rush to act in July.<\/p>\n
Fundamentals Support Standing Pat<\/p>\n
Carpenter further cited multiple macroeconomic data points to support his baseline forecast of “no hikes for the full year.” He pointed out that the nonfarm payrolls data released last week continues to provide the Fed with room to remain patient on policy. At the same time, Morgan Stanley’s internal inflation forecast is significantly lower than the median projection of Federal Open Market Committee (FOMC) members.<\/p>\n
More notably, Carpenter mentioned that methodological revisions to the Personal Consumption Expenditures (PCE) price index could lead to further substantial downward adjustments in inflation readings. He stated that these factors combined make him feel “comfortable” sticking to his full-year no-hike call, and while future data could still change the conclusion, all current evidence points in the same direction.<\/p>\n
Refuting the “AI Inevitably Leads to Rate Cuts” Argument<\/p>\n
In the report, Carpenter specifically raised sharp doubts about the popular market narrative that “Artificial Intelligence (AI) will bring disinflation and thus drive rate cuts,” bluntly stating that this simplistic assertion is “almost certainly wrong.”<\/p>\n
Carpenter pointed out that the wave of AI capital expenditure emerged earlier and on a larger scale in the United States, and in the short term, it actually has a marginal inflationary effect. He refuted the AI-driven rate-cut thesis on three levels: first, the state of the business cycle is the key factor dominating policy direction; second, the disinflationary effect is only one of many impacts from AI, and higher productivity also pulls demand by stimulating consumption and investment; third, faster productivity growth implies a higher equilibrium interest rate (what economists call r*), which actually weakens the logical basis for rate cuts.<\/p>\n
Diverging Policy Paths Across the Atlantic<\/p>\n
Compared to the Fed’s wait-and-see stance, the ECB’s tightening direction appears more definitive. Carpenter observed in his note that ECB President Christine Lagarde reiterated in Sintra that the June rate hike was a deliberate decision, not merely a “precautionary hike.” In Carpenter’s view, this phrasing suggests there is still room for further rate increases ahead.<\/p>\n
Morgan Stanley’s current baseline forecast is for the ECB to hike rates by another quarter-point in September. However, Carpenter added that softer European inflation data and a sharp drop in oil prices last week have preserved flexibility for policy adjustments. He believes that if inflation continues to soften or Purchasing Managers’ Index (PMI) data shows significant weakness, the path to another ECB rate hike could be blocked, but an immediate hike in July, or more than one hike within the year, still seems hard to imagine at this point.<\/p>\n","protected":false},"excerpt":{"rendered":"Federal Reserve (Fed) Chair Kevin Warsh’s policy direction is becoming the focal point of global financial markets. Morgan…\n","protected":false},"author":2,"featured_media":87019,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2388],"tags":[78,2169,46219,1858,11476,14944,2954,34824,46220,46218],"class_list":["post-87018","post","type-post","status-publish","format-standard","has-post-thumbnail","category-european-central-bank","tag-artificial-intelligence","tag-christine-lagarde","tag-ecb-forum-on-central-banking-in-sintra","tag-european-central-bank","tag-federal-reserve","tag-kevin-warsh","tag-morgan-stanley","tag-nonfarm-payrolls","tag-pce-inflation","tag-seth-carpenter"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts\/87018","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/comments?post=87018"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts\/87018\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/media\/87019"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/media?parent=87018"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/categories?post=87018"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/tags?post=87018"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}