Morgan Stanley has revised its forecast for U.S. monetary policy, predicting that the Federal Reserve will hold rates steady through the end of 2026. This adjustment follows the April Federal Open Market Committee (FOMC) meeting, where the policy rate remained unchanged and the committee signaled a move away from an easing bias. Previously, Morgan Stanley had anticipated rate cuts in September and December of the current year.
The firm's analyst, Michael Gapen, now expects two 25-basis-point rate cuts to occur in January and March of 2027. These cuts would bring the Federal Funds Rate target range to between 3.0% and 3.25%. Morgan Stanley noted that the FOMC's characterization of inflation was upgraded from "somewhat elevated" to "elevated," and three members dissented in favor of entirely removing the easing bias, which the bank viewed as significant.
The decision to maintain rates through 2026 is also influenced by elevated inflation, a resilient economy, and rising energy prices, which have collectively raised the bar for monetary easing. Fed Chair Jerome Powell's repeated acknowledgment of the committee's shift towards a more neutral stance further supports this outlook. Morgan Stanley also referenced recent hot inflation reports and predictions of prolonged energy price spikes as contributing factors.
While Morgan Stanley projects the Fed to remain on hold through 2026, other firms like J.P. Morgan Global Research also expect the Fed to remain on hold for the rest of 2026, but then anticipate a single 25 basis point hike in September 2027. The upcoming FOMC meeting in June, under the new leadership of Chair Kevin Warsh, is a key event to watch for potential changes in forward guidance. Warsh has expressed intentions to overhaul the Fed's approach and potentially shrink its balance sheet.
