Fed rates are unlikely to go anywhere near zero, even if US economy tips into recession

Morgan Stanley (MS) came out with a research paper late Wednesday suggesting that the major central banks are on track to hit peak interest rates within the next few months. The MS, however, also said that central banks will likely pause rates for an extended period before they start easing, but investors should brace for other scenarios.

Key findings

Bank of Canada may have hit its peak already; in the US, the Federal Reserve seems to be edging closer, as banking sector volatility dialed back expectations around future hikes; and the US and Europe may have more hikes in store as their central banks try to manage renewed inflation.

But investors should not be looking for a return to the low rates they have come to expect in recent cycles.

Markets are now aligned with Morgan Stanley Research’s view that the Fed’s upcoming hike on May 3 will be the last.

However, we do not expect sudden and drastic cuts to follow, and rates are unlikely to go anywhere near zero, even if the U.S. economy tips into recession.

Morgan Stanley Research sees a mild recession as the base case in the U.K. If anything, the Bank of England (BoE ) may hike further to avoid re-accelerating inflation.

We think the European Central Bank (ECB) is also willing to accept a recession to bring down inflation.

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