BlockBeats News, July 20th, the market showed a clear divergence regarding the Federal Reserve's future monetary policy path. Former New York Fed President Dudley believes that the pressure for a rate hike may reignite in the fall, while Morgan Stanley expects the Fed to keep rates unchanged this year. Deutsche Bank warned that if the Fed shifts to rely on balance sheet tightening policy, the US dollar may face sustained pressure.

Dudley pointed out that despite recent declines in gasoline prices, improvements in core inflation, and slowing job growth reducing the short-term need for a rate hike, there are still four main reasons to support maintaining a tight policy.

First, the US unemployment rate remains close to full employment levels, and the core inflation rate is still in the range of 2.4%-3.3%, necessitating continued demand constraints. Second, the current financial environment has not significantly tightened, as the Fed's financial conditions index shows that the market environment remains stimulative. Third, the expansion of the AI industry may drive up prices in areas such as electricity and chips, increasing inflationary pressures. Fourth, the Fed has long been unable to stabilize inflation back to the 2% target, challenging the credibility of its policy.

In contrast, Morgan Stanley's Chief US Economist Michael Gapen believes that the Fed is highly likely to stand pat for the whole year and expects only two rate cuts in 2027 after inflation falls back.

The institution believes that the impact of tariffs on prices is weakening, housing inflation continues to decline, the easing of the situation in Iran is pushing oil prices down, and the cooling of the labor market also reduces the need for rate hikes. Morgan Stanley stated that the market tightening on its own is equivalent to about 4 rate hikes of 25 basis points each, indicating that the Fed does not need to take further action.

Deutsche Bank is focused on the possibility of the Fed reducing its balance sheet. The bank's FX director, George Saravelos, stated that if the Fed chooses balance sheet reduction instead of rate hikes, it could be bearish for the US dollar.