Speaker · Updated
Michael Gapen: latest market views
Morgan Stanley
Summary
Michael Gapen is Morgan Stanley's Chief U.S. Economist, a role he took up in late 2024 after serving as Chief US Economist at Barclays and working at BofA Securities, the Federal Reserve and the IMF.
Chorus has 14 views from Michael Gapen across 5 episodes on Thoughts on the Market (Morgan Stanley), Prof G Markets and CNBC Closing Bell since October 22, 2026.
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Much of current inflation is supply-driven by energy and tariffs, so rate hikes cannot fix it directly.
Gapen argues the Fed's hold reflects the view that much of today's inflation comes from supply shocks it cannot fix, because raising rates doesn't bring more oil to market. Without the tariffs, the Middle East conflict and the Russia-Ukraine crisis, inflation was decelerating and could have fallen close to 2% in Europe and the US. Monetary policy is poorly suited to every supply shock. The Fed's aim is to lean against second-round effects, where energy costs spill into other goods, so it hikes less than headline inflation would suggest.
“a lot of this inflation is driven by supply side forces that we can't really fix. In other words, the Fed raising rates doesn't bring more oil to markets.”at 22:38
Prof G Markets: Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech ·
The Fed's urgency message clashes with holding rates; if it wants its 2% target taken seriously, it must act.
Gapen says the Fed frames the 2% target as central and says it will hit it, but he notes that actions matter more than words. The Fed describes the economy as growing strongly, with inflation above target, yet it waited. Gapen thinks there are reasons to wait, but the chair did not explain them. If the target and the urgency are as important as the Fed says, Gapen asks why it waited, and says this creates some conflict in the message.
“Actions have to speak. Words are important, but actions ultimately are most important... If all of this is that important and that urgent and the economy is this strong, why did you wait?”at 28:17
Prof G Markets: Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech ·
Core PCE should drift down to about 2.6% by end of 2027, still above the Fed's target.
Gapen treats core inflation as the best measure of underlying price trends, since headline is being driven by energy. He expects core inflation of about 3.1% year on year in the near term and around 3% by year end 2026. Residual seasonality, meaning firms raise prices early in the year, will keep inflation elevated and sticky through roughly the end of Q1 2027. After that, a clearer downward trend should bring core PCE to about 2.6% by the end of 2027. That is directionally toward the target but not all the way to it.
“We think core PCE finishes next year at around 2.6.”at 30:02
Prof G Markets: Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech ·
The Fed will hike again in December and March, with the pace of tightening slowing over time.
Gapen expects the Fed to raise rates in December and then for a third time in March. He thinks the Fed could also reach the same restriction by early next year, and that this would deliver about the same tightening into 2027 and 2028. Growth is solid, the labor market isn't overheating, and inflation is sticky but has come down. Given that, the committee is making a modest recalibration, with rates going higher but not necessarily at consecutive meetings. The Fed has time to assess whether energy prices are feeding into other prices through second-round effects.
“We think they will raise rates again in December and then for a third time in March.”at 30:18
Prof G Markets: Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech ·
Warsh's reformer approach and reticence may cause messaging conflict, but new chairs usually settle in within six to twelve months.
Warsh speaks less and gives little explanation, which Gapen finds frustrating for markets, although his restraint is skillful. Gapen also says Warsh sees himself as a reformer who believes the institution has drifted from its core principles over the past decade or two and wants to steer it back. That creates a recipe for messaging conflict with the 15 to 18 FOMC members who do things the old way, and could make for mixed messages. Gapen adds that every new chair has indigestion, and it usually takes six months to a year to develop a style and relationship with markets.
“the other backdrop is he's coming into the position as a reformer. He views himself as a reformer. He thinks the way that the institution has worked over the past decade or two is incorrect, and he wants to change things.”at 31:40
Prof G Markets: Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech ·
US economy isn't overheating: labor market loose and wage growth decelerating despite AI investment.
Growth is resilient and inflation is sticky, but the labor market doesn't look like it is overheating. Job gains are only about 50,000 a month. The unemployment rate is low, but wage growth is decelerating. Gapen argues there is little evidence that the broader economy is overheating even with the AI investment boom. Because the Fed isn't behind the curve, it doesn't need to tighten aggressively, which supports a measured recalibration rather than a more aggressive hiking cycle.
“We're only adding about 50,000 jobs a month. The unemployment rate is low. That's true. But wage growth is actually decelerating.”at 3:06
Thoughts on the Market (Morgan Stanley): To Hike or Not to Hike ·
Fed delivers one more rate hike in March, then stops once inflation is clearly decelerating.
Residual seasonality is still in the data: many firms raise prices once a year, mostly in January and February, and the seasonal adjustment process doesn't capture this. That makes it harder for the Fed to read the underlying inflation trend, so it needs more data before deciding. Gapen's view is that this means one more hike in March. After that, it only becomes clear that inflation is decelerating and the Fed stops hiking. He adds that the labor market isn't overheating, so there is no urgency to hike at every meeting. Firming inflation could shift the Fed to hiking every meeting, and a broad-based labor market turnaround could bring more hikes in 2027.
“So in our view, it actually means you still get one additional rate hike in March. Then after that, it only starts to become clear that inflation is decelerating and the Fed stops hiking.”at 6:40
Thoughts on the Market (Morgan Stanley): To Hike or Not to Hike ·
Fed will hold this week but signal further hikes, a hawkish hold with about two dissents.
Gapen agrees with the market that the Fed will hold this week. The Fed will say it did not feel urgency to raise rates again today, while signaling that the policy rate will still go higher, which he calls a hawkish hold. Market tightening is doing some of the Fed's work, and Fed officials may point to tighter financial conditions and volatility, which would sound more dovish. He expects two dissents, down from three in July; the closer to zero, the more dovish the message. He is factoring energy-driven second-round effects into next year's inflation forecast. The economy can handle 75 to 100 basis points of total hikes, but six or seven hikes back to 2023 levels would change the answer.
“We do agree with the market that the Fed will be on hold. ... we didn't find a lot of urgency to raise rates again today, but you should still expect the policy rate to go higher in the future.”at 24:52
CNBC Closing Bell: Closing Bell Overtime: Markets Face a Big Week as AI Takes Center Stage 10/26/26 ·
Fed tightening is a recalibration against energy second-round effects, adding about 75bp by March.
The Fed is tightening because inflation is persistent and officials are dissatisfied with the pace of convergence to target. The Fed cannot offset the oil shock, so it is leaning against second-round effects from energy prices, which makes this a recalibration rather than a meaningful tightening of policy. Inflation is gradually moving lower and long-run inflation expectations are stable. Financial conditions are already moderately restrictive after the rise in long-end yields and wider credit spreads, and there is little evidence of an overheating labor market. Unless AI spending broadens into labor demand and higher wages, the Fed does not have much more work to do. Gapen expects two more hikes, about 75bp in total, by March next year.
“The way I look at it is this is a story about persistent inflation, and I would look at it as a recalibration of policy. ...it appears to me to be more about a recalibration than it is about meaningfully tightening policy and leaning into demand.”at 1:08
Thoughts on the Market (Morgan Stanley): One Global Shock, Different Rate Paths ·
Energy shock is starting to pass through into US core goods prices such as airfares and cars.
Second-round effects from the energy price shock should show up in airfares, apparel, new and used cars, and motor vehicles and parts. The September inflation report showed these other goods prices were firm, which Gapen treats as an early sign of energy pass-through into other parts of core inflation. He says the next readings will show whether the pattern continues.
“And here, I think that would show up in airfares, apparel, new and used cars, motor vehicles, and parts. ...this is an early sign of energy pass through into other parts of CORE.”at 6:33
Thoughts on the Market (Morgan Stanley): One Global Shock, Different Rate Paths ·
AI infrastructure & data centers
AI hyperscaler capex adds about 0.4 to 0.6 points to US quarterly growth, supporting growth.
Gapen's team translates AI hyperscaler capex directly into GDP and finds AI contributes four to six tenths to growth in any given quarter. He says the contribution could be nudged higher if AI is raising productivity, which he believes it is. He also links the AI spending to asset-market appreciation over several years, which supports resilient spending by upper-income households. He concludes that AI-related spending, and its link to asset markets and upper-income households, is the clear answer to US growth resilience.
“And in the direct translation of AI hyperscaler CapEx spending to growth, we find that AI is accounting for four to six tenths contribution to growth in any given quarter.”at 1:04
Thoughts on the Market (Morgan Stanley): Economic Roundtable: What’s Keeping Global Growth Going? ·
Manufacturing & industrial policy
US capex is broadening beyond AI into manufacturing, driven partly by supply-chain redundancy and reshoring.
Gapen sees the US investment story broadening, most clearly in manufacturing. He links this to a multipolar world that needs redundancy and supply-chain build-out, which may create an incentive for reshoring, and to spillovers from AI and from geopolitics. He cautions that US manufacturing is only about 10% of output and employment, so the broadening is real but limited in scale.
“So it's not just an AI story. I think you can characterize it as a bit broader.”at 6:18
Thoughts on the Market (Morgan Stanley): Economic Roundtable: What’s Keeping Global Growth Going? ·
AI infrastructure & data centers
If US growth rests on the AI investment cycle, AI overinvestment is the greater longer-term risk.
Gapen says that the US economy's resilience is being driven by the AI investment cycle. Looking further out, he thinks a potential overinvestment cycle is the greater risk than a near-term shock from rates. The view is conditional on the economy depending on AI capex, and it is framed as a risk over a longer horizon.
“if we look further out, if the resiliency of the economy is driven by the AI investment cycle, then I think a potential overinvestment cycle is the greater risk.”at 11:29
Thoughts on the Market (Morgan Stanley): Economic Roundtable: What’s Keeping Global Growth Going? ·
A much more dramatic tightening cycle with much higher rates would be a near-term US vulnerability.
Gapen identifies higher rates as the near-term vulnerability for the US economy. The risk he describes is a shift to a much more dramatic tightening cycle, in which interest rates go a lot higher. He treats this as a more immediate threat than the AI overinvestment risk he sees further out.
“if the central bank has to shift to a much more dramatic tightening cycle and interest rates go a lot higher, that would be a near term vulnerability.”at 11:29
Thoughts on the Market (Morgan Stanley): Economic Roundtable: What’s Keeping Global Growth Going? ·
Shows
- Thoughts on the Market (Morgan Stanley) · 3 episodes
- Prof G Markets · 1 episode
- CNBC Closing Bell · 1 episode
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