Morgan Stanley sees Fed cutting by half percentage point at July meeting

Federal Reserve Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee meeting in Washington, June 19, 2019.

Kevin Lamarque | Reuters

Morgan Stanley economists expect the Federal Reserve to make a half percentage point rate cut to head off downside risks and the impact of a weakening global economy and trade tensions.

“Risks to the outlook remain skewed to the downside. A non-linear impact to growth could materialize if financial conditions tighten, bringing corporate credit risks to the fore,” the economists wrote in a note Wednesday.

The economists said a strong policy response is “necessary to guard against risks of a further, sharper loss of economic momentum. Weak incoming data, lingering trade tensions, and preventing both financial conditions from tightening and a non-linear adverse impact on growth are key reasons for a front-loaded adjustment.”

The fed funds futures market is pricing in a full 25 basis point rate cut and the potential for slightly more. The Fed’s benchmark fed funds target rate range is currently 2.25 to 2.50%.

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