Mapping Global Central Bank Paths

Summary

Podcast Summary: Thoughts on the Market – "Mapping Global Central Bank Paths"

Date: January 22, 2026
Host: Seth Carpenter (Morgan Stanley Global Chief Economist, Head of Macro Research)
Guests:

• Mike Gapen (Chief US Economist, Morgan Stanley)
• Chetan Aiya (Chief Asia Economist, Morgan Stanley)
• Jens Eisenschmirt (Chief Europe Economist, Morgan Stanley)

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Episode Overview

In this episode, Morgan Stanley's top regional economists gather for a quarterly economic roundtable to examine the evolving paths of major global central banks. The focus is on central bank policy in the US, Japan, and Europe amidst shifting economic growth trends, labor markets, inflation, and currency movements—all in a world still debating stability versus volatility. The economists share their baseline outlooks, discuss risks, and break down what could alter the expected course for rates and monetary policy.

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Key Discussion Points & Insights

1. US: Entering a More Stable Phase or Continued Volatility?

Speaker: Mike Gapen
Timestamp: 00:42–04:45

• Baseline Outlook:

  • 2026 growth expected to be modestly above trend—forecast at ~2.4%, similar to 2025.
  • Clarity has improved on deregulation, immigration, and fiscal policy, making for a more predictable policy environment.
  • Key factors for markets: inflation path and the pace of decline.

• Inflation and Fed Policy:

  • Firms are still passing tariffs to consumers; anticipated to last through Q1 2026.
  • "If that's the case, then we think the Fed can execute one or two more rate cuts…but we have those coming in the second half of the year." (Mike Gapen, 01:54)
  • The Fed is in "wait and see" mode, monitoring effects of previous cuts.

• Risks & Forecast Misses:

  • 2025 saw stronger than expected growth—driven by capex from AI firms and robust spending from higher-income consumers.
  • "Our models suggest that consumption is overshooting its fundamentals, which I think makes it harder for the economy to accelerate further…" (Mike Gapen, 03:16)
  • Upside risks: fiscal stimulus could drive stronger demand, keeping inflation elevated and delaying rate cuts.

• Markets:

  • Expectations for Fed cuts have been dialed back as growth remains strong.

2. Japan: Currency Challenges and Shifting Inflation Dynamics

Speaker: Chetan Aiya
Timestamp: 04:45–08:17

• Macro Outlook:

  • Positive view on Japan’s growth, expecting transition from supply-driven to demand-driven inflation as real wage growth picks up.
  • "We are expecting to see the transition…to real wage growth accelerating that supports real consumption growth and we move away from that supply side driven inflation to demand side driven inflation." (Chetan Aiya, 05:29)

• Impact of Yen Depreciation:

  • Depreciation is starting to pressure the Bank of Japan (BoJ), although so far, policy normalization has been more about ending negative rates and reaching healthy nominal growth.
  • "In the backdrop, what we are seeing on currency depreciation is making things a bit more challenging for the BoJ." (Chetan Aiya, 05:48)

• Policy Implications:

  • Risk that BoJ may need to hike rates earlier than originally projected (possibly before January 2027) to limit yen weakness and inflation spillover.
  • "There is also a threshold of where the currency can be and beyond a point, it begins to hurt the households in form of imported inflation pressures." (Chetan Aiya, 07:17)

• Wage Dynamics:

  • BoJ must monitor inflation expectations and wage negotiations as workers push for higher pay in the face of headline inflation driven by currency.

3. Europe: Disinflation and the ECB’s Next Moves

Speaker: Jens Eisenschmirt
Timestamp: 08:17–11:56

• Current Inflation Picture:

  • Europe awaiting a crucial inflation print (expected February 4) that could see headline inflation fall below the ECB’s 2% target.
  • Disinflation driven by energy base effects, services reset at year start, and wage moderation—especially in German manufacturing.

• ECB Policy Outlook:

  • Forecasting two cuts in 2026 (June and September), bringing rates to a 1.5% terminal level—an out-of-consensus view.
  • "We think the chances for this are pretty good... wage disinflation is proceeding nicely." (Jens Eisenschmirt, 09:12)

• Key Pushbacks from Market:

  • Skeptics argue wages won’t fall and fiscal stimulus could lead to overheating. Jens counters fiscal expansion is mainly in one country (Germany).
  • "But we think that discussion will change the moment you are below target in an actual inflation print. The burden of proof is the opposite. Now you have to prove is the economy really on a track that inflation will get back up to target without further monetary stimulus?" (Jens Eisenschmirt, 11:15)

• Market Signaling:

  • Little current signal from ECB on further cuts, but actual prints below target would shift the debate.

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Notable Quotes & Memorable Moments

• On US growth forecasts after 2025:

  • “Growth overall for the year was over 2%, close to 2.5%. So, so if that's what we just came off of, why isn't it the case that we'd see even stronger growth, maybe even a re acceleration of growth in 2026?”
    —Seth Carpenter, 02:26

• On the challenge of yen depreciation for Japan:

  • “...when currency reaches these very high levels of range, you are going to see BoJ having to act.”
    —Chetan Aiya, 08:08

• On the ECB’s potential for out-of-consensus rate cuts:

  • “The burden of proof is the opposite. Now you have to prove is the economy really on a track that inflation will get back up to target without further monetary stimulus?”
    —Jens Eisenschmirt, 11:15

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Key Timestamps for Important Segments

• 00:42 – Discussion begins on US economic outlook for 2026 (Mike Gapen)
• 01:54 – Fed’s possible rate cut timeline and inflation descent
• 03:16 – On consumption and possible limits to further US acceleration
• 05:23 – Japan macro outlook and currency implications (Chetan Aiya)
• 07:17 – Currency and inflation risk thresholds for the BoJ
• 08:51 – Europe: inflation print and ECB outlook (Jens Eisenschmirt)
• 11:15 – Market pushback and shifting ECB decision-making logic

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Conclusion

This episode delivers a rich, expert-driven outlook on central bank policy trajectories across the US, Japan, and Europe. The panel weighs baseline scenarios and explores the key risks and catalysts that could lead central banks to deviate from the current, market-expected path. Whether it's the possibility of fewer-than-expected Fed cuts, an early BoJ move to support the yen, or an ECB that surprises markets with rate cuts, listeners come away with a nuanced understanding of the core global monetary policy debates heading into 2026.

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Transcript

[A]

Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's global chief economist and head of macro research. And today we're kicking off our quarterly economic roundtable for the year, and we're going to try to think about everything that matters in economics around the world. And today we're going to focus a little bit more on central banking. And when we get to tomorrow, we'll focus on the nuts and bolts of the real side of the economy. I'm joined by our chief regional economists.

[B]

Hi, Seth. I'm Mike Gapen, chief US Economist at Morgan Stanley.

[C]

I'm Chetan Aiya, chief Asia economist.

[D]

And I'm Jens Eisenschmirt, chief Europe economist.

[A]

It's Thursday, January 22nd, at 10am in.

[D]

New York and 4pm in Frankfurt and.

[C]

9Pm in Hong Kong.

[A]

So, Mike Gapen, let me start with you. As we head into 2026, what are we thinking about? Are we going into a more stable expansion? Is this just a different phase with the same amount of volatility? What do you think is going to be happening in the US As a baseline outlook? And then if we're going to be wrong, which direction would we be wrong?

[B]

Yeah, Seth, we took the view that we would have more policy certainty. Recent weeks have maybe suggested we're incorrect on that front. But I still believe that when it comes to deregulation, immigration policy and fiscal policy, we have much more clarity there than we did a year ago. So I think it's another year of modest growth above trend growth. We're forecasting something around 2.4% for 2026. That's about where we finished 2025. I think what's key for markets and the outlook overall will be whether inflation comes down. Firms are still passing through tariffs to the consumer. We think that'll happen at least through the end of the first quarter. It's our view that after that, inflation pressures will start to diminish. If that's the case, then we think the Fed can execute one or two more rate cuts, but we have those coming in the second half of the year. So it looks like growth is strong enough, the labor market has stabilized enough for the Fed to wait and see, to look around, see the effects of their prior rate cuts, and then push policy closer to neutral if inflation comes down.

[A]

And if we go back to last year to 2025, I'll give you the credit First, Morgan Stanley did not shift its forecast for a recession in the US the way some of our main competitors did. On the other hand, and this is where I maybe tweak you just a little bit. We underestimated how much growth there would be in the United States. Capex spending from AI firms was strong. Consumer spending, especially from the top half of the income distribution in the US was strong. Growth overall for the year was over 2%, close to 2 1/2%. So, so if that's what we just came off of, why isn't it the case that we'd see even stronger growth, maybe even a re acceleration of growth in 2026?

[B]

Well, some of that say improvement vis a vis our forecast. The outperformance, some of that I think comes mechanically from trade and inventory variability. So I'm not sure that that says a lot about an improving trend rate of growth. Where there was other outperformance was as you noted, from the consumer. Now our models, and I don't mean too technical here, but our models suggest that consumption is overshooting its fundamentals, which I think makes it harder for the economy to accelerate further and then AI, it's harder for AI spending to say get incrementally stronger than where it is. So we're getting a little extra boost from fiscal. We've got that coming through and I just think what it is is more of the same rather than further acceleration from here.

[A]

Do you think there's a chance that the Fed in fact does not cut rates like you have in your forecast?

[B]

Yes, I do think so. Where we could be wrong is we've made assumptions around the one big beautiful bill and what it will contribute to the economy. But as you know, there's a lot of variability around those estimates. If the bill is more catalytic to animal spirits and business spending than we've assumed, you could get, say demand driven animal spirits upside to the economy, which may mean inflation doesn't decelerate all that much. But I do think that that's say the main upside risk that we're considering. Markets have been gradually taking out probabilities of Fed cuts as growth has come in stronger. So far the inflation data has been positive in terms of signaling about disinflation. But I would say the jury's still out on how much that continues.

[A]

Cheddon, I'm actually going to shift to you. When I think about Japan, we know that it's been the developed market central bank that's going in the opposite direction. They've been hiking when other central banks have been cutting. We got some news recently that probably put some risk into our baseline outlook that we published in our year ahead view about both Growth and inflation in Japan and with it what the bank of Japan is going to do in terms of its normalization. Can you just walk us through a little bit about our outlook for Japan? Because right now I think that the yen, Japanese rates, they're all part of the ongoing market narrative around the world.

[C]

Yeah, Seth. So look, I mean on a big picture basis we are constructive. On the Japan macro outlook. We think normal GDP growth remains strong. We are expecting to see the transition of the consumers from them seeing, you know, supply side inflation, keeping the real wage growth low, to a dynamic where we transition to real wage growth accelerating that supports real consumption growth and we move away from that supply side driven inflation to demand side driven inflation. So broadly we are constructive. But I think in the backdrop, what we are seeing on currency depreciation is making things a bit more challenging for the boj. While we are expecting that demand side pressure to build up and drive inflation in the trailing data, it is still pretty much currency depreciation and supply side factors like food inflation driving inflation. And so BoJ has been hesitant. So while we had the expectation that BOJ will hike in January of 2027, we do see the risk that they may have to take up rate hike earlier to manage the currency not getting out of hand and adding on to the inflation pressures.

[A]

Would I be right in saying that up until now the yen has swung pretty widely in both directions, but the weakening of the Yen until now hasn't been really the key driver of the bank of Japan's policy reaction. It's been growth picking up, inflation picking up, wanting to get out of negative interest rates first, wanting to get away from the zero lower bound. Second, the weaker yen in some sense could have actually been seen as a positive up until now because Japan did go through 25 years of essentially stagnant nominal growth. Is this actually that much of a fundamental change in the bank of Japan's thinking needing to react to the weakness of the yen?

[C]

Broadly, what you're saying is right, Seth, but there is also a threshold of where the currency can be and beyond a point, it begins to hurt the households in form of imported inflation pressures. And remember that inflation has been somewhat high, even if it is driven by currency depreciation and supply side factors for some time. And so BoJ has to be over watchful of potential lift in inflation expectations for the households. And at the same time they are also watching the underlying inflation impact of this currency depreciation. Because what we have seen is that over period workers have been demanding for higher wages and that is also influenced by what happens to headline inflation, which is driven by currency depreciation. So I would say that yes, it's been true up until now, but when currency reaches these very high levels of range, you are going to see BoJ having to act.

[A]

Jens, let's shift then to Europe. The ECB had been on a cutting cycle. They came to the end of that. President Lagarde said that she thought the disinflationary process had ended. In your year ahead forecast and a bunch of your writing recently, you've said maybe not so fast, there could still be some more disinflationary, at least risk in the pipeline for Europe. Can you talk a little bit about what's going on in terms of European inflation and what it could mean for the European Central Bank? Because clearly that's going to be first order important for markets.

[D]

I think that is right. I think we have a crucial inflation print ahead of us that comes out on the 4th of February, early February. We get some signal whether our anticipated fall of headline inflation here below the ECB's target is actually materializing. We think the chances for this are pretty good. There's a mix why this is happening. One is energy, energy disinflation and base effects. But the other thing is services inflation resets always at the beginning of the year. January and February are the crucial month here. We had significant services upward pressure on prices the last years. And so just from base effects, we think we will see less of that. And another picture or another element of that picture is that wage disinflation is proceeding nicely. We have notably a significant weakness in the EXP oriented manufacturing sector in Germany, which is a key sector of setting wages for the country. The country is around 30% of the euro area GDP. And here we had seen significant wage gains over the last year. So the disinflationary trend coming from lower wage gains from this country, that will be very important and an important signal to watch. Again, that's something we don't know. I think soon we have to watch simply monthly prints here, but a significant print for the first quarter comes out in May. And all of that together makes us believe that the ECB will be in a position to see enough data or have seen enough data that confirms the thesis of inflation staying below target for some time to come so that they can cut in June and September to a terminal rate of 1.5%.

[A]

That is, I would say, out of consensus relative to where the market is. When you talk to investors, whether they're in Europe or around the world, what's the big pushback that you get from them when you are explaining your view on how the ECB is going to act?

[D]

There are two essential pushbacks. So one is on substance. So no, actually wages will not come down and the economy will actually start overheating soon because of the big fiscal stimulus. That, in a nutshell, is the pushback on substance. I would say here, as you would say before, not so fast, because the fiscal stimulus is only in one country. It's 30%, but only 30% of the euro area. Plus there is another pushback which is on the reaction function of the ecb. Here we tend to agree. So far we have heard from policymakers that they feel rather comfortable with the 2% rate level that they are at. But we think that discussion will change the moment you are below target in an actual inflation print. The burden of proof is the opposite. Now you have to prove is the economy really on a track that inflation will get back up to target without further monetary stimulus? We believe that will be the key debate and again, happy to sort of concede that there is for now not a lot of signaling out of the ECB that further rate cuts are coming, but we believe the first inflation print of the year will change that debate significantly.

[A]

All right, so that makes a lot of sense. However, looking at the clock, we are probably out of time for today. So for now. Michael Chetan Jens, thank you so much for joining today and to the listener, thanks for listening and be sure to tune in tomorrow for part two of our conversation. And I have to say, if you enjoy this show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.