Morgan Stanley Pushes Fed Rate Cut Forecast to 2027 Amid Stubborn Inflation and Hawkish Policy Signals

Morgan Stanley now predicts the U.S. Federal Reserve will not cut interest rates in 2026, delaying the first cuts to early 2027.

This change is driven by a recent spike in inflation, fueled by rising oil prices, and the Fed's increasingly cautious or 'hawkish' stance.

Uncertainty around the Fed's upcoming leadership change is also contributing to expectations that interest rates will remain 'higher for longer.'

Morgan Stanley has significantly shifted its forecast for when the U.S. Federal Reserve will begin cutting interest rates.

Previously, the bank expected rate cuts in late 2026, but now they see the Fed holding steady throughout the year, with the first reductions not happening until January and March of 2027. This means the 'higher-for-longer' interest rate environment, which makes borrowing more expensive, is likely to stick around longer than many had hoped. So, what's behind this change? The story boils down to three main factors.

First and foremost is stubborn inflation. After a period of cooling down, inflation has flared up again. A major culprit is the price of oil, which surged recently due to geopolitical tensions and disruptions in key shipping lanes. This directly increased gasoline prices, pushing up the main inflation number, known as headline CPI. While core inflation, which excludes volatile food and energy prices, has been more stable, it's still hovering around 3%. That's a full percentage point above the Fed's 2% target, making the central bank very hesitant to start cutting rates.

Second, the Federal Reserve itself is sending hawkish signals. At its recent meeting in April, the Fed held interest rates steady and explicitly pointed to rising energy prices as a concern. Some members of the rate-setting committee even wanted to adopt a more aggressive anti-inflation stance. This communication shows the Fed is in no rush to ease policy and is prepared to wait until it's confident that inflation is truly under control.

Finally, there's political uncertainty. Federal Reserve Chair Jerome Powell's term is ending, and a new leader could soon take the helm. The leading candidate, Kevin Warsh, is seen by some as potentially more hawkish, meaning he might favor keeping rates higher to fight inflation. This leadership transition adds another layer of uncertainty, making it less likely the Fed will take a dovish (rate-cutting) turn anytime soon. Together, these factors have created a compelling case for delaying rate cuts well into 2027.

Glossary
Hawkish: A term used to describe a monetary policy stance that favors higher interest rates to fight inflation. The opposite is 'dovish.'
Core PCE (Personal Consumption Expenditures): The Fed's preferred measure of inflation. It tracks the prices of goods and services purchased by consumers, excluding the more volatile food and energy categories.
FOMC (Federal Open Market Committee): The committee within the Federal Reserve that is responsible for setting the direction of monetary policy, including interest rates.

Morgan Stanley Pushes Fed Rate Cut Forecast to 2027 Amid Stubborn Inflation and Hawkish Policy Signals

Morgan Stanley now predicts the U.S. Federal Reserve will not cut interest rates in 2026, delaying the first cuts to early 2027.

This change is driven by a recent spike in inflation, fueled by rising oil prices, and the Fed's increasingly cautious or 'hawkish' stance.

Uncertainty around the Fed's upcoming leadership change is also contributing to expectations that interest rates will remain 'higher for longer.'

Morgan Stanley has significantly shifted its forecast for when the U.S. Federal Reserve will begin cutting interest rates.

Glossary
Hawkish: A term used to describe a monetary policy stance that favors higher interest rates to fight inflation. The opposite is 'dovish.'
Core PCE (Personal Consumption Expenditures): The Fed's preferred measure of inflation. It tracks the prices of goods and services purchased by consumers, excluding the more volatile food and energy categories.
FOMC (Federal Open Market Committee): The committee within the Federal Reserve that is responsible for setting the direction of monetary policy, including interest rates.