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Morgan Stanley economist: The Fed 'needs to cut 50 basis points' to stave off a slowdown

Key Points
  • Morgan Stanley's Chetan Ahya tells CNBC the Fed needs to cut rates aggressively this week.
  • Traders are pricing in a 76% probability of a 25 basis point cut, according to the CME's FedWatch Tool, with a 24% probability of the more aggressive cut.
  • "When you're thinking about the economy, the job market and retail sales will be lagging. What is leading is Capex and corporate profitability, and that is already deteriorating," Ahya says.
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Capex 'deteriorating,' expect 50 basis-point Fed cut: Morgan Stanley's Ahya

A top economist at Morgan Stanley told CNBC on Monday that he expects the Federal Reserve to cut interest rates by 50 basis points this week because of weak business investment in the United States.

A report from the Commerce Department last week showed that business investment in the U.S. declined 5.5% in the second quarter, adding to the mixed economic data for the Fed to sort through as it prepares to vote on whether to shift its benchmark interest rate.

Morgan Stanley's Chetan Ahya said on "Closing Bell " that the weak business investment will likely make the Fed more aggressive with rates.

"When you think about the job market, right now the momentum is already slowing ... and the impact of the global slowdown will show further on the [capital expenditure] numbers, further on the job market. So if the Fed wants to be preemptive, it needs to cut 50 basis points," Ahya said.

The Fed is set to announce its target interest rates on Wednesday at 2 p.m. ET, followed by a press conference from Chairman Jerome Powell.

President Donald Trump said in a tweet Monday morning that "a small rate cut is not enough. " Trump has repeatedly criticized the Fed and Powell for not cutting the overnight funds rate.

Ahya said companies are looking at the global slowdown when making investment decisions, and that the Fed will be considering the possibility of the global slowdown spreading to the U.S. in making its decision on rate cuts.

"When you're thinking about the economy, the job market and retail sales will be lagging. What is leading is capex and corporate profitability, and that is already deteriorating," Ahya said.

Ahya's expectation is outside of market consensus. Traders have priced in a 76% probability of a 25 basis point cut, according to the CME's FedWatch Tool, with a 24% probability of the more aggressive cut.

Earlier this month, the market took a speech by New York Fed President John Williams as a sign of an impending 50 basis point cut. However, a spokesperson for the New York Federal Reserve said shortly after that it "was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting."

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Key Points
  • As the Fed's rate decision approaches Wednesday, it's unclear how many members will vote in favor of an anticipated rate cuts, expected to receive a majority vote.
  • There have been one or more dissenters at 37% of Fed rate meetings since 1987, but there's the potential for a higher than normal divide at the two-day Fed meeting that starts Tuesday because of the recent improvements in economic data.
  • "I think if you had two or three dissenters, it would tell you that there's a bigger uncertainty around the path of future rates than what the market is currently anticipating," said Guggenheim's Scott Minerd.