Morgan Stanley Strategist Warns of Equities Sell-Off in Response to ‘Hawkish’ Fed Message

On Monday, Morgan Stanley’s equity strategist, Michael Wilson, shared his thoughts on the state of Wall Street. He expressed his belief that a sell-off could be imminent, and that this could occur as a result of U.S. Federal Reserve chairman Jerome Powell’s upcoming remarks on Wednesday. Furthermore, there has been a great deal of conjecture surrounding the possibility of the central bank cutting the federal funds rate multiple times throughout the year. However, Wilson believes that investors who are expecting this outcome will ultimately be disappointed.

Powell’s Message Could Spark a ‘Near-Term Negative Surprise for Equities’

This Wednesday, all eyes will be on the Federal Open Market Committee (FOMC) meeting, as the U.S. Federal Reserve is poised to raise the benchmark interest rate by 25 basis points (bps). While some economists predict that this hike will be the final one of the year, a few market observers anticipate multiple rate cuts in the future. These speculators point to the recent banking industry turmoil in the U.S. as a potential catalyst for the Fed to loosen its monetary policy.

However, there are several analysts who believe that investors expecting cuts are in for a rude awakening. They caution that the Fed’s commitment to holding rates high and not cutting this year is unwavering, due to persistent inflation. According to Morgan Stanley’s equity strategist, Michael Wilson, U.S. equity markets may be in for a rough ride this week if chairman Jerome Powell fails to meet the market’s expectations of a benchmark rate cut.

Wilson warns that a “hawkish” message from Powell could trigger a “near-term negative surprise for equities,” causing a sell-off. Wilson also notes that the market has grown increasingly reliant on tech stocks with large valuations, which could exacerbate the impact of any negative news. Furthermore, he warns that investors who are banking on the Fed cutting rates this year are likely to be frustrated with the outcome.

“We believe that equities are priced for an optimistic policy outcome (rate cuts in ’23 without the growth downside),” Wilson stated in his note to investors.

Fed Officials Desire to Avoid the Mistakes of Past Fed Chairs

The sentiment that the Federal Reserve will maintain its strict stance on interest rates is not limited to Morgan Stanley’s equity strategist. Claudia Sahm, an American economist and macroeconomic expert, echoed this sentiment on Sunday, stating that Powell had made it clear that the Fed would not cut rates this year and that people should “believe him.”

In a Twitter thread, Sahm thinks the Fed’s stance will be strict for three reasons: the desire to avoid the mistakes of past Fed chairs, the reverence for former chair Paul Volcker’s approach to monetary policy, and the personal experiences of current Fed officials with high inflation in the 1970s and early 1980s. Sahm tweeted:

Markets expect the Fed to cut multiple times this year—referred to as a pivot—while the Fed says it will hold rates high and not cut this year. I believe the Fed.

In response to Claudia Sahm’s comments on the Federal Reserve’s commitment to holding rates high, the Twitter account Wall Street Silver pointed out that while Paul Volcker’s monetary policy and the emergence of new oil sources in the early 1980s helped control inflation, the underlying problems persist.

“The Fed can’t solve this problem,” Wall Street Silver said. They can kill the economy, but as soon as rates come down, the same underlying problems exist and inflation roars back. The Fed only has one tool and will print us into oblivion eventually, because they can’t fix this.” Sahm clarified that she was merely explaining “how the history is viewed inside the Fed, not what’s true.”

Do you think the Federal Reserve’s commitment to holding rates high will be enough to control inflation, or will the underlying problems persist and lead to a potential economic crisis? Share your thoughts in the comments section below.