In short
Morgan Stanley’s Arunima Sinha discusses the Fed’s likely next policy moves after the July CPI, arguing the Fed should stay on hold in 2024. She says tariff effects are still ramping up with delayed price impacts, and that tariff-exposed goods (excluding apparel and autos) remain firm.
Key claims
services inflation reversed upward, led by higher airfares and hotel prices, making it unlikely that services disinflation will offset tariff-driven goods inflation. Core CPI and core PCE inflation remain at last year’s pace, keeping inflation above the Fed target. September risk hinges on August jobs data: solid hiring/unemployment ~4.2–4.3% supports “look-through,” while a sharp hiring drop could restart easing.
Guests
none mentioned; only the host/speaker, Arunima Sinha (Global Economist, Morgan Stanley).
Notable examples
airfares and hotel prices; May/June employment weakness attributed to “Liberation Day” uncertainty.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOFed's Policy Path and CPI Analysis
0:22 to 1:40
Discussion on the Fed's policy approach following the July CPI print and inflation expectations.
“Our baseline call has been that the Fed will remain on hold this year, and last week's CPI print has not changed that view.”
Risks to Fed's Decision-Making
1:40 to 3:08
Exploration of potential risks affecting the Fed's decision to maintain or change its policy stance.
“would still see inflation remaining well above the Fed's target.”
Global Central Bank Outlook
3:08 to 4:32
Analysis of how the Fed's stance influences other central banks, particularly in Europe and Japan.
“Outside the U.S., central bank trajectories remain tightly linked to both the Fed's path and the evolving U.S.”
Transcript
Automatic transcript. May contain errors.0:00Arunima Sinha:Welcome to Thoughts on the Market. I'm Arunima Sinha, Global Economist at Morgan Stanley. Today, our evaluation of the Fed's policy path following the July CPI print and the broader implications for other central banks. It's Wednesday, August 20th at 2 p.m. in New York. Our baseline call has been that the Fed will remain on hold this year, and last week's CPI print has not changed that view. As we have noted, average tariff rates are still ramping up given the implementation delays, and so their cumulative effect on prices could be more lagged. Within the CPI print, tariff-exposed goods, other than apparel and autos, continue to be firm.
0:50Arunima Sinha:The surprise came in services inflation, which showed a reversal led by the uptick in airfares and hotel prices, which had been running in deflationary territory for much of this year. Some of the pushback against our view on inflation stepping up over the summer due to tariffs was that services disinflation could compensate. But, as this print showed, that is unlikely to be the case. While we expect services inflation to continue to moderate, we think that services disinflation in the first half of 2025 was exaggerated by weakness in volatile competence. And both core CPI and core PC inflation are still at their pace from last year.
1:35Arunima Sinha:So further acceleration in goods inflation from tariff effects over the summer would still see inflation remaining well above the Fed's target. After the July U.S. employment and CPI reports, the bar for the Fed to stay on hold in September is clearly higher. So what are the risks to our call? The road goes back to how the data and the Fed's reaction function will evolve over ahead of the September meeting. The August jobs report will be important. If it is a solid employment report with a sequential acceleration in payrolls and the unemployment rate around 4.2 to 4.3%, then the Fed could likely look through the weakness in the May and June prints attributing the slowdown to the uncertainty following Liberation Day, and not representative of the underlying trend.
2:32Arunima Sinha:If, however, there were to be a sharp drop-off in the hiring pace, which is currently not being indicated by other job market indicators such as jolts or claims, then the Fed could take the view that the labor market is much weaker than anticipated and restart easing. There is also the possibility of a cut from a risk management perspective. Even with inflation running well above target, the Fed could take the July employment report as a clear signal of downside risk to the labor market and start the easing cycle. Messaging from Fed officials has so far been mixed, with some taking signal from the jobs data and others remaining less worried with the unemployment rate remaining low.
3:19Arunima Sinha:Outside the U.S., central bank trajectories remain tightly linked to both the Fed's path and the evolving U.S. growth outlook. Recent labor market data have introduced downside risks to our ECB and BOJ calls. In Europe, if euro strength persists and U.S. recession risks rise, our euro area economists see a reduced risk to their September easing baseline. In Japan, the Bank of Japan remains cautious. Stronger U.S. data could tilt the balance toward a rate hike later this year, though October remains a high hurdle, making December or beyond more plausible. That said, if the U.S. economy slows in line with our forecast, the likelihood of further BOJ tightening diminishes, reinforcing our base case, the BOJ staying on hold through end of 2026.
4:31It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
Markets have already priced in a Fed cut, given the mixed economic data in the July labor and CPI prints. Our Global Economist Arunima Sinha makes the case for why we’re standing by our baseline call for a higher bar for a rate cut.
Read more insights from Morgan Stanley.
----- Transcript -----
Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha, Global Economist at Morgan Stanley.
Today – our evaluation of the Fed's policy path following the July CPI print, and the broader implications for other central banks.
It's Wednesday, August 20th at 2pm in New York.
Our baseline call has been that the Fed will remain on hold this year, and last week’s CPI print has not changed that view. As we have noted, average tariff rates are still ramping up given the implementation delays, and so their cumulative effect on prices could be more lagged. Within the CPI print, tariff exposed goods other than apparel and autos continued to be firm. The surprise came in services inflation, which showed a reversal led by the uptick in airfares and hotel prices, which had been running in deflationary territory for much of this year.
Some of the pushback against our view on inflation stepping up over the summer due to tariffs was that services disinflation could compensate. But as this print showed, that is unlikely to be the case. While we expect services inflation to continue to moderate, we think that services disinflation in the first half of [20]25 was exaggerated by weakness and volatile competence; and both core CPI and core PCE inflation are still at their pace from last year.
So further acceleration in goods inflation from tariff effects over the summer would still see inflation remaining well above the Fed's target. After the July U.S. employment and CPI reports, the bar for the Fed to stay on hold in September is clearly higher.
So, what are the risks to our call?
The road goes back to how the data and the Fed's reaction function will evolve over ahead of the September meeting. The August jobs report will be important. If it is a solid employment report, with a sequential acceleration in payrolls and the unemployment rate around 4.2 to 4.3 percent, then the Fed could likely look through the weakness in the May and June prints – attributing the slowdown to the uncertainty following Liberation Day and not representative of the underlying trend.
If, however, there were to be a sharp drop off in the hiring pace, which is currently not being indicated by other job market indicators such as jolts or claims, then the Fed could take the view that the labor market is much weaker than anticipated and restart easing. There is also the possibility of a cut from a risk management perspective.
Even with inflation running well above target, the Fed could take the July employment report as a clear signal of downside risk to the labor market and start the easing cycle. Messaging from Fed officials has so far been mixed, with some taking signal from the jobs data and others remaining less worried with the unemployment rate remaining low.
Outside the U.S., central bank trajectories remain tightly linked to both the Fed's path and the evolving U.S. growth outlook. Recent labor market data have introduced downside risks to our ECB and BoJ calls.
In Europe, if Euro strength persists and U.S. recession risks rise, our euro area economists see a reduced risk to their September easing baseline. In Japan, the Bank of Japan remains cautious. Stronger U.S. data could tilt the balance toward a rate hike later this year – though October remains a high hurdle, making December or beyond more plausible. That said, if the U.S. economy slows in line with our forecast, the likelihood of further BoJ tightening diminishes reinforcing our base case – the BoJ staying on hold through end of 2026.
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