US Federal Reserve Chairman Jerome Powell delivers remarks during a press conference following the announcement that the Federal Reserve left interest rates unchanged, in Washington, US, June 12, 2024.
Evelyn Hockstein | Reuters
The U.S. Federal Reserve and European Central Bank could cut interest rates in September as key data provide further signals that inflation is cooling in the U.S. and euro zone, a Morgan Stanley strategist said on Friday.
Andrew Sheets, managing director and head of cross-asset strategy, told CNBC that the bank had become optimistic about the prospect of dual cuts amid recent consumer price index and labor market data in the U.S. and Europe.
“We are more optimistic that both the Fed and ECB will cut rates in September,” he told Squawk Box Europe.
Earlier this month, the two central banks already indicated that monetary policies were diverging. The ECB made its first interest rate cut in almost five years, while the Fed insisted that US inflation is still too high to make a similar move.
“It's understandable that these central banks don't want to commit up front. They don't want to sound too complacent about the risks of inflation,” Sheets said.
“But we think the data the ECB will see in September will be inflation numbers [is] continues to moderate. And I think inflation continues to come down for the Fed,” he added.
Inflation in the eurozone surprised positively in May, with an increase of 0.2 percentage points on a monthly basis to 2.6%. Fluctuations were expected, due to base effects from the energy market and the phasing out of government support across the bloc.
US inflation, meanwhile, remained stable in May, but was 3.3% higher last year than a year ago CPI data showed earlier this month. That was an improvement over the 0.1% monthly gain that economists had expected.
Markets are now looking ahead to the key May personal consumption expenditures price index, the Fed's favorite gauge of inflation, due out Friday morning.
Analysts expect headline PCE to be flat from April and up 2.6% from the year before. Excluding volatile food and energy prices, core PCE is expected to be up 0.1% from the month before, which Sheets also said is in line with his expectations.
A majority of economists interviewed by Reuters now expect the Fed to cut rates from the current range of 5.25% to 5.50% in September, with a further cut later this year. The ECB is also expected to cut interest rates in September and December.
