Morgan Stanley delays Fed rate cut calls to late 2026, citing inflation risks, tariffs, and energy shocks raising the bar for easing.

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Summary:

• Morgan Stanley pushes Fed rate cut timing back to September and December
• Inflation concerns dominate Fed messaging, with heavy focus on oil and prices
• Tariff pass-through seen as key hurdle before Fed can assess disinflation
• Energy shock adds further uncertainty, raising bar for easing
• Markets pricing fewer cuts, with risk Fed delivers only one late-2026 move

Morgan Stanley has pushed back its expectations for Federal Reserve rate cuts, arguing that persistent inflation risks and heightened macro uncertainty will delay easing until later in the year.

The bank now expects the Fed to begin cutting rates in September and December, a shift from its prior forecast for June and September. The revision reflects a growing view that recent increases in oil prices and renewed upward pressure on headline inflation will require more time for policymakers to gain confidence that disinflation is firmly underway.

The firm highlighted that inflation concerns dominated the Fed’s (March) post-meeting communication, with a clear imbalance in focus compared to labour market conditions. Analysis of the press conference showed a strong skew toward inflation-related discussions, reinforcing the view that policymakers remain highly sensitive to upside price risks, particularly those stemming from energy markets.

A key takeaway from the meeting was the Fed’s cautious approach to supply-driven inflation shocks. While central banks have historically looked through energy-driven price spikes, policymakers signalled that the current environment is more complex. In particular, the Fed appears unwilling to dismiss energy-related inflation pressures until it is confident that tariff-related price increases have fully passed through to core goods.

This sequencing effectively raises the bar for declaring that disinflation has resumed, delaying the conditions under which the Fed would feel comfortable easing policy. At the same time, longer-term inflation expectations remain a critical variable, with policymakers likely to require evidence that expectations stay anchored before shifting toward rate cuts.

Market pricing reflects this more cautious outlook. Investors have pared back expectations for near-term easing, with pricing at one stage implying only a single rate cut late in the year.