Morgan Stanley chief global economist Seth Carpenter said after attending the European Central Bank’s annual forum in Sintra, Portugal, that the Federal Reserve is unlikely to raise interest rates this year. Based on Warsh’s latest public remarks, recent labor-market data, and Morgan Stanley’s inflation outlook, the bank is maintaining its base-case call for no additional Fed hike in 2026. In Carpenter’s view, that means markets do not need to aggressively reprice near-term tightening risk.
Sintra remarks point to less urgency for a near-term move
According to Carpenter, Warsh’s comments at the Sintra policy forum broadly preserved the tone of his initial post-appointment messaging: a firm commitment to price stability, but without laying out a detailed path for achieving it. Still, Carpenter identified two meaningful shifts in emphasis that, taken together, suggest a marginally more dovish interpretation than markets may have previously assumed.
First, Warsh appeared to frame the Fed’s dual mandate in a more balanced way. Carpenter said the new chair had earlier left investors with the impression that inflation control was overwhelmingly dominant. In Sintra, however, Warsh more clearly acknowledged the full-employment side of the mandate, implying that labor-market conditions still matter materially in policy calibration.
Second, Warsh explicitly noted that the latest policy meeting, combined with lower oil prices, had already helped push down market-based inflation expectations and the term premium. He also referred to multiple working groups being formed and suggested that these efforts would take time. Carpenter interpreted that combination of language as a signal that the Fed is not rushing toward action, and that a July rate hike looks unlikely under the current setup.
Labor data and inflation forecasts support a hold-through-year view
On the macro side, Carpenter said the latest U.S. nonfarm payrolls report continues to give the Fed room to remain patient. Rather than forcing an immediate response from policymakers, the employment backdrop appears consistent with staying on hold while officials assess incoming inflation and growth data. That patience is also reinforced by Morgan Stanley’s own inflation outlook.
Carpenter noted that the bank’s inflation forecast sits meaningfully below the current median projection from FOMC participants. He also pointed to the possibility that methodological revisions to PCE inflation could produce a further substantive downward adjustment in reported inflation readings. Put together, these factors leave him comfortable maintaining the forecast that the Fed will not raise rates at any point this year, even if future data could still alter that assessment.
Carpenter rejects simplistic “AI means cuts” narrative
Carpenter also addressed the increasingly common market argument that artificial intelligence will mechanically generate disinflation and therefore lead to rate cuts. He argued that such a narrative is too simplistic. In the United States, AI-related capital spending has emerged earlier and on a larger scale than in many other economies, and in the near term that investment wave may actually add some marginal inflationary pressure rather than reduce it.
He offered three broader rebuttals. First, the business cycle remains the dominant driver of policy decisions. Second, any disinflationary impulse from AI is only one channel among many, while stronger productivity can also stimulate demand through higher consumption and investment. Third, faster productivity growth can imply a higher equilibrium or neutral rate, often referred to by economists as r*, which in turn weakens the case for assuming easier monetary policy. Carpenter’s conclusion was blunt: the claim that AI will inevitably produce rate cuts is “almost certainly wrong.”
ECB path still looks tighter, with September hike as base case
Carpenter contrasted the Fed outlook with the European Central Bank, where the policy path still appears more clearly tilted toward further tightening. He said ECB President Christine Lagarde reiterated in Sintra that the June rate increase was a deliberate decision rather than a merely preventive move. In Carpenter’s reading, that language leaves the door open to additional tightening rather than signaling that the cycle is already over.
Morgan Stanley’s base case is for the ECB to deliver another 25 basis points of rate hikes in September. Even so, Carpenter said the path is not without risk. Softer-than-expected European inflation data and a sharp decline in oil prices have created more room for policy flexibility. If inflation continues to cool or if soft indicators such as PMI deteriorate meaningfully, the case for another hike could weaken. Still, he said it is currently hard to imagine either a move as soon as July or more than one additional hike this year.