M IdeaUS Economics & Global Macro Strategy | North AmericaFOMC Preview: Annual HousekeepingMorgan Stanley & Co. LLCEllen ZentnerChief US Economist Ellen.Zentner@morganstanley.com +1 212 296-4882 Guneet Dhingra, CFAStrategist Guneet.Dhingra@morganstanley.com +1 212 761-1445 Jay BacowStrategist Jay.Bacow@morganstanley.com +1 212 761-2647 Sam D CoffinEconomist Sam.Coffin@morganstanley.com +1 212 761-4630 Andrew M WatrousStrategist Andrew.Watrous@morganstanley.com +1 212 761-5287 Matthew HornbachStrategist Matthew.Hornbach@morganstanley.com +1 212 761-1837 Diego AnzoateguiEconomist Diego.Anzoategui@morganstanley.com +1 212 761-8573 Sarah A WolfeEconomist Sarah.Wolfe@morganstanley.com +1 212 761-0857 Morgan Stanley MUFG Securities Co., Ltd.+Zuri Z ZhaoStrategist Zuri.Zhao@morganstanleymufg.com +81 3 6836-5466 Morgan Stanley & Co. LLCJanie XueStrategist Janie.Xue@morganstanley.com +1 212 761-6051 Martin W Tobias, CFAStrategist Martin.Tobias@morganstanley.com +1 212 761-6076 Lenoy DujonUS/Canada Economist Lenoy.Dujon@morganstanley.com +1 212 761-2779 Zoe K StraussStrategist Zoe.Strauss@morganstanley.com +1 212 761-0407 We expect little change to the statement and no signal of an imminent cut. The rotation of voters tilts a bit less favorable for an early cut. Discussion will center on inflation and the rates path ahead, and the balance sheet. Our strategists stay long UST 5y.Key expectations• The FOMC remains on hold at 5.375%. We continue to expect 100bp of cuts this year, beginning in June. The Fed cuts by an additional 200bp in 2025, returning policy to a neutral setting. • We expect little change in the FOMC statement as the Fed awaits direction from important revisions to employment and inflation in early February. • In the Q&A, Chair Powell acknowledges discussion of the Fed's balance sheet and sounds pleased even while cautious on inflation progress as revisions loom. He is likely to repeat that rates will be lower this year, but avoid committing to any particular meeting.• Our rates strategists stay biased long duration with 5y notes into the FOMC meeting, but even they do not see a major move happening on the back of the FOMC meeting itself. Even if the FOMC is neutral for duration, they see potential for the recent rise in yields to fade, amid a cooling inflation backdrop. • Our FX strategists forecast that the USD will rise against G10 currencies by the end of 2024. Our economists are above consensus on US growth, and below consensus for growth abroad. USD has closely tracked investor sentiment on the China outlook, which may remain subdued. However, we do not currently recommend long USD positions due to our expectation that 5y Treasury yields will decline and the potential for further equity index gains between the last Fed hike and the first Fed cut. A high-frequency fair value FX valuation model also suggests that a number of G10 currencies are u...
