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Jerome Powell

Michael Gapen, Chief U.S. Economist at Morgan Stanley, said that while the Fed’s current stance appears hawkish, he doesn’t rule out a shift to a more dovish approach in the near future. Speaking after the release of the latest Personal Consumption Expenditures (PCE) report, Gapen highlighted underlying trends in inflation and the Fed’s potential policy trajectory.
Gapen assessed the November PCE report, which showed a modest increase of 0.1, as positive. It noted that the decline in housing-related inflation was a significant factor and that progress was being made in addressing one of the root causes of high inflation. However, there remains some persistence in goods prices, particularly in the auto sector, due to storm-related disruptions.
“The data shows that inflation is falling,” Gapen said, adding that more confirmation would be needed before the Fed would consider cutting interest rates as early as March.
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Gapen predicts that December inflation figures could follow a similar pattern, with an increase between 0.17% and 0.2%. However, January could show a seasonal increase. Despite these fluctuations, he sees a clear trend toward disinflation that could affect the Fed’s future decisions.
While the Fed has maintained a hawkish tone recently, Gapen believes that stance is not set in stone. He pointed to comments from Chairman Jerome Powell that monetary policy remains restrictive, but less so than in previous months.
“There’s a lot of inflation tolerance in their forecasts,” Gapen said, adding that the Fed doesn’t expect to reach its 2% inflation target by 2027. “If activity slows, inflation falls and labor markets soften, the Fed could shift to a more dovish approach.”
*This is not investment advice.
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Morgan Stanley Chief Economist Speaks: “The Fed Returned to a Hawkish Tone Today, But…”

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