Morgan Stanley delays Fed rate cut view to 2027 amid inflation

Morgan Stanley on Wednesday revised its outlook for US monetary policy, saying it now expects the Federal Reserve to begin cutting interest rates only next year.

The brokerage dropped its earlier forecast that easing could begin in 2026, citing persistent inflation and continued economic strength.

Tthe revised stance comes after the central bank held policy rates steady in a sharply divided decision.

The split was the most pronounced since 1992, signalling uncertainty among policymakers about the future path of interest rates.

Fed decision triggers market reaction

The Fed’s decision had an immediate impact on financial markets.

US Treasury yields climbed to their highest level in a month, while the dollar strengthened to a two-week high.

The market reaction reflected expectations that interest rates could remain elevated for longer than previously anticipated.

Morgan Stanley noted that inflation remains above the Fed’s 2% target.

At the same time, recent economic data indicate resilience in both growth and labour markets.

This combination has reduced the urgency for policymakers to begin easing monetary policy.

“The bar for cuts is higher and the Fed seems prepared to wait,” the bank said, as cited in a Reuters report.

It added that policymakers are likely to proceed cautiously as they evaluate the delayed impact of earlier rate hikes and assess whether recent disinflation trends will hold.

Outlook for rate cuts remains delayed

Despite pushing back its timeline, Morgan Stanley still expects some easing in the future.

The brokerage forecast that rate cuts could take place in January and March, once inflation pressures show clearer signs of easing and economic growth moderates toward trend levels.

However, the shift in expectations highlights growing uncertainty about the timing of policy changes.

The Fed appears focused on maintaining a restrictive stance until it gains greater confidence that inflation is sustainably moving toward its target.

Diverging views among major banks

Other financial institutions have also taken a cautious view on the Fed’s policy trajectory.

Earlier this month, Deutsche Bank said it expects the central bank to keep interest rates unchanged in 2026.

The bank cited still-elevated inflation and a careful approach by policymakers.

The divergence in forecasts underscores the complexity of the current economic environment.

While some expect gradual easing, others believe the Fed may hold rates steady for longer.

Market pricing shifts amid uncertainty

Market expectations have also shifted significantly following the Fed’s latest decision.

Traders are now pricing in roughly a 44% probability of a rate increase by April 2027.

This marks a sharp rise from about 8% before the announcement, based on data from CME FedWatch.

The shift suggests that investors are increasingly preparing for a scenario where policy tightening could persist or even intensify, depending on inflation trends.

Geopolitical risks add to inflation concerns

Several Fed officials have pointed to geopolitical developments as an additional source of uncertainty.

They said earlier this month that the war in the Middle East has already contributed to inflationary pressures.

Heightened uncertainty linked to global events has made it more difficult for the central bank to clearly communicate its next steps.

Policymakers remain cautious as they balance inflation risks with the need to support economic stability.