Synopsis:

Morgan Stanley anticipates a series of 25bp cuts from the Federal Reserve through mid-2025 and recommends maintaining short positions on USD/JPY, targeting a move towards 138.

Key Points:

1. FOMC Rate Decision:

   • The FOMC cut the federal funds rate by 50bp to 4.875%, reflecting ongoing progress on inflation and concerns regarding the labor market.

2. Economic Projections Update:

   • The Summary of Economic Projections (SEP) now indicates four cuts this year, a significant shift from the previously expected one, aligning with softer inflation and labor market data.

3. Fed's Commitment:

   • The initial larger cut signals the Fed's dedication to staying ahead of inflationary pressures. Chair Powell emphasized that future cuts will depend on incoming data.

4. Forecast for Future Cuts:

   • Morgan Stanley projects two additional 25bp cuts this year and four more in the first half of 2025.

5. FX Strategy:

   • The firm's FX strategists recommend shorting USD/JPY as the Fed continues its easing cycle.

Conclusion:

Morgan Stanley's outlook supports a strategy of shorting USD/JPY in anticipation of ongoing Fed cuts, positioning the dollar for potential weakness as the easing cycle unfolds.