The U.S. Federal Reserve (Fed) and the European Central Bank (ECB) could both reduce interest rates in September, reflecting a significant shift in monetary policy amid signs of moderating inflation, according to a Morgan Stanley strategist.
Andrew Sheets, managing director and head of cross-asset strategy at Morgan Stanley, told CNBC’s “Squawk Box Europe” on Friday that the financial institution is increasingly optimistic about the prospect of synchronized rate cuts from the two central banks. This outlook is based on recent data indicating cooling inflation in both the U.S. and the eurozone.
“We’re more optimistic that both the Fed and ECB will cut rates in September,” Sheets said, highlighting the bank’s analysis of recent consumer price index (CPI) figures and labor market trends in both regions.
Earlier this month, the ECB cut its interest rate for the first time in almost five years, marking a divergence from the Fed’s stance, which maintained that inflation in the U.S. remains too high for a similar action. However, Sheets believes this divergence may be temporary as more data becomes available.
“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,” he explained. “But we think the data that the ECB will see by September is [that] inflation [is] continuing to moderate. And I think, for the Fed, inflation is continuing to fall.”
Recent eurozone inflation figures surprised markets in May, increasing by 0.2 percentage points month-on-month to reach 2.6%. This uptick was attributed to base effects from energy market fluctuations and the phase-out of government support measures across the bloc.
In the U.S., the latest CPI data showed that inflation remained steady in May, registering a 3.3% year-on-year increase, which was slightly higher than the 0.1% monthly gain economists had predicted. Eyes are now on the core personal consumption expenditures price index (PCE), the Fed’s preferred inflation measure, expected to show minimal change from April but 2.6% higher on the year.
A survey by Reuters found that most economists now anticipate a Fed rate cut from the current range of 5.25% to 5.50% in September, with additional reductions likely before year-end. The ECB is similarly expected to decrease rates in September and again in December.
The potential for these rate cuts reflects a broader consensus that inflationary pressures are easing, allowing central banks to pivot toward more supportive monetary policies.
