Morgan Stanley is holding firm on its prediction for two Federal Reserve rate cuts in 2026, positioning itself as an outlier against a more cautious Wall Street consensus.
While many market participants have scaled back their expectations to just one rate cut this year, Morgan Stanley believes recent events support a more accommodative path. Their argument hinges on a specific interpretation of the latest economic signals, suggesting that inflationary pressures are manageable and temporary.
First, they view the recent spike in oil prices, driven by geopolitical tensions, as a transitory shock rather than a structural shift. They point to the fact that Brent crude prices surged to nearly $120 per barrel before quickly retreating below $90 on the same day. This volatility suggests the price jump won't feed into long-term inflation, a key condition for the Fed to feel comfortable cutting rates.
Second, underlying inflation data appears to support their case. The latest Consumer Price Index (CPI) report showed that core inflation, which excludes volatile food and energy prices, is continuing its gradual cooling trend. A key component, shelter costs, rose only modestly, indicating that the biggest driver of recent inflation is losing momentum. This trend, combined with anchored inflation expectations (as measured by the 5-year breakeven rate), suggests there is no widespread panic about future price hikes.
Finally, a cooling labor market provides the Federal Reserve with more flexibility. Recent data showed a surprising drop in payrolls and a slight uptick in the unemployment rate. A softer job market reduces the risk of a wage-price spiral and gives the Fed more room to ease policy without overheating the economy. While the Fed's own projections (the 'dot plot') from late 2025 suggested only one cut in 2026, Morgan Stanley is betting that this more recent data will persuade policymakers to act sooner and more decisively, starting in June.
- Core Inflation: A measure of inflation that excludes volatile items like food and energy. It is often seen as a better indicator of underlying long-term inflation trends.
- Inflation Expectations: The rate at which people—consumers, businesses, and investors—expect prices to rise in the future. Central banks monitor this closely, as expectations can influence actual inflation.
- Dot Plot: A chart that shows the projections of each Federal Reserve official for the future path of interest rates. It provides a signal of the central bank's collective thinking.