Morgan Stanley warns: If unemployment rate falls below 4%, the Federal Reserve may be forced to raise interest rates.

BlockBeats news, June 27 — Morgan Stanley maintains its baseline forecast that the Fed will keep interest rates unchanged throughout the year, but warns that if the unemployment rate falls below 4% or inflation remains persistently high, this judgment will be forced to shift toward a rate-hike direction. Analyst Michael Gapen said in a client report that data since the June FOMC meeting has made the firm “slightly more comfortable” with its “no rate hike” baseline — with oil prices falling after the signing of the U.S.-Iran memorandum of understanding, and with tariff pass-through effects expected to be peaking. Morgan Stanley projects headline and core PCE inflation for the fourth quarter at 3.2% and 3.0%, respectively, far below the median expectations of FOMC participants. In terms of the labor market, Morgan Stanley expects 50,000 to 60,000 net new jobs each month during the summer, enough to keep the unemployment rate roughly flat.

However, Gapen warns that if the unemployment rate falls below 4.0%, the Fed may view risks of labor-market overheating as sufficient to support a rate hike; if the monthly core inflation rate continues to stay at 0.3% or above, or if the Middle East conflict escalates again, the view will also be reassessed. At the time this assessment was released, Brent crude was down to about $72.6, and the market is closely watching subsequent employment and inflation data to calibrate policy expectations for the Fed under Warsh’s governance.