U.S. stagflation risk heats up as two Wall Street giants sharply diverge on Fed's rate path

Mark Haefele, chief investment officer of UBS Global Wealth Management, gave his verdict on President Donald Trump's massive new round of tariffs at around 2 a.m. local time in Zurich. In a report to clients, he wrote that the Fed would be forced to cut interest rates sharply this year, possibly as many as four times. About 12 hours later, Michael Gapen, Morgan Stanley's chief U.S. economist, came to the diametrically opposite conclusion: the Fed won't cut rates now. His team withdrew its forecast of a possible rate cut in June and now expects the Fed will have to wait until next year to cut rates again.In their report, Gapen and his team said, ‘The Fed will have difficulty ignoring upward inflationary pressures in the near term without being able to ease monetary policy quickly.’ This huge divergence highlights the particularity and complexity of the U.S. economic predicament in the context of the escalating trade war.