Morgan Stanley's Sheets Discusses What's Next for Fed

Summary

Andrew Sheets of Morgan Stanley discusses the Fed's policy outlook, expecting inflation to ease in the second half of the year, keeping the Fed on hold with a potential cut next year. He notes that a Fed hike would increase market volatility and flatten the yield curve, and advises watching inflation breakevens as a key signal for shifting policy.

• Sheets expects inflation to decline in H2, allowing the Fed to stay on hold and potentially cut next year.
• Labor market data is expected to remain choppy, adding uncertainty.
• A Fed hike would likely inject volatility and flatten the yield curve.
• Higher inflation breakevens could signal market concerns and prompt a Fed response.
• The market does not need rate cuts to remain strong; stable policy is supportive.
• AI-related spending is contributing to inflationary pressures in memory, power, and compute.
• Core services inflation remains elevated, while shelter costs are a disinflationary factor.
• The Fed's dual mandate shows success on jobs but incomplete on inflation.