Morgan Stanley Fixed-US Economics Global Macro Strategy FOMC Preview Septembe...-110301353

M IdeaUS Economics & Global Macro Strategy | North AmericaFOMC Preview: September MeetingMorgan Stanley & Co. LLCSeth B CarpenterChief Global Economist Seth.Carpenter@morganstanley.com +1 212 761-0370 Matthew HornbachStrategist Matthew.Hornbach@morganstanley.com +1 212 761-1837 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 Lenoy DujonUS/Canada Economist Lenoy.Dujon@morganstanley.com +1 212 761-2779 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 Morgan Stanley & Co. International plc+David S. Adams, CFAStrategist David.S.Adams@morganstanley.com +44 20 7425-3518 Morgan Stanley & Co. LLCMartin W Tobias, CFAStrategist Martin.Tobias@morganstanley.com +1 212 761-6076 Zoe K StraussStrategist Zoe.Strauss@morganstanley.com +1 212 761-0407 The cycle begins with a 25bp cut and a stress on both sides of the dual mandate. The dot plot will have to change, but we do not expect Chair Powell to be firm on the size of future cuts. Our strategists maintain 2s20s steepeners. Key expectations• The FOMC cuts the fed funds rate by 25bp to 5.125%. The FOMC statement acknowledges further progress on inflation and risks to the labor market. The Summary of Economic Projections (SEP) will likely show a shift to three cuts this year instead of one, marking-to-market for softer inflation and labor market data.• In the press conference, we do not expect Chair Powell to commit to a cadence for cuts, but to indicate that future decisions will be based on the data.• We look for three 25bp cuts total this year.• Our rates strategists suggest investors maintain UST 2s20s steepeners and maintain flatteners between the September FOMC OIS rate and November FOMC OIS rates. • Our FX strategists recommend short USD/JPY positions as the Fed starts its cutting cycle.• On the agency MBS side, our strategists remain neutral on the mortgage basis and prefer buying up-in-coupon conventionals.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be sub