Morgan Stanley: Even if the Fed cuts rates this summer, it could be too late to stop a recession

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Federal Reserve Board Chairman Jerome Powell testifies before the Senate Committee on Banking, Housing, and Urban Affairs on Capitol Hill in Washington, DC, on February 26, 2019.

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Even if the Federal Reserve does what the market wants and lowers interest rates this summer, things may already be too far gone, according to Morgan Stanley.

“Fed cuts may come too late,” Morgan Stanley’s equity strategist Michael Wilson said in a note to clients Monday. “Fed could cut as soon as July but it may not halt slowdown/recession.”

The economy is already facing some “very real macro risks” including weak jobs data, low inflation and escalating trade tensions, Wilson said.

The market is expecting a rate cut by July by the Fed in response to diving bond yields, volatile stock markets and some sings of weakness. On Friday, May payrolls came in much lower-than-expected and the markets rallied in hopes that the Fed would start cutting as soon as July.

Paired with the “falling rate of inflation and the inability to hits its 2 percent goal” and trade tensions weighing on business confidence, the Fed’s rate cut won’t halt a weakening economy, Wilson said.

Morgan Stanley changed its forecast for global growth to “stagnation” through the end of the year instead of a “continued recovery.”

Investors should stay defensive, despite a more dovish Federal Reserve, Wilson said.

“Investor enthusiasm around the idea of easier Fed policy is understandable,” Wilson said. “However, if the Fed were to cut out of concern that we are entering a real unemployment cycle, we think such a cut should not be bought. Until there is further clarity on the employment picture, we think Friday’s rally should be faded and investors should continue to skew portfolios defensively.”

Wilson said to keep “a cautious eye toward expensive growth stocks that are now at a greater risk of missing earnings estimates due to these very real macro economic risks.”

— with reporting from CNBC’s Michael Bloom

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