According to a report by Reuters, the brokerage now expects the Federal Reserve to begin easing rates only in September, instead of its earlier projection of June. The shift aligns Morgan Stanley with peers such as Goldman Sachs and Barclays, both of which have also recalibrated their outlook in response to recent macroeconomic developments.
The revised forecast reflects mounting concerns that elevated energy prices could complicate the inflation trajectory in the near term. Oil prices have surged past the $100-per-barrel mark following the intensification of the Middle East conflict and the disruption of the Strait of Hormuz, a critical artery for global oil shipments. The strait accounts for nearly one-fifth of global oil trade, amplifying the impact of supply disruptions on energy markets.
In its updated outlook, Morgan Stanley now anticipates two quarter-percentage-point rate cuts in 2026, likely in September and December. This marks a departure from its earlier expectation of rate reductions beginning mid-year. Despite the delay, the broader consensus among major Wall Street firms continues to point toward two rate cuts within the year.
The Federal Reserve, in its latest policy meeting, opted to keep interest rates unchanged while signaling heightened vigilance over inflation risks. Updated projections from policymakers suggest that a majority still foresee at least one rate cut before year-end, though the timing remains uncertain.
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The central bank’s cautious stance has been reinforced by the uncertain economic implications of rising oil prices. While higher energy costs are expected to feed into headline inflation, the extent and persistence of their impact remain unclear. Policymakers are closely monitoring whether these pressures will spill over into broader price trends or dampen economic activity.
Morgan Stanley strategists, as cited by Reuters, flagged that the primary risk to their outlook is a further delay in rate cuts, or even the possibility that easing may not materialize if inflation proves more stubborn than expected. At the same time, they acknowledged that a sharper escalation in oil prices could weaken economic growth and labor market conditions, potentially accelerating the need for policy support.Market expectations appear to be adjusting accordingly. Reuters data indicates that traders are increasingly betting on a prolonged pause, with the CME FedWatch tool suggesting more than a 70% probability that the Federal Reserve will hold rates steady through September.
The evolving outlook underscores the delicate balancing act facing the Federal Reserve as it navigates a complex mix of geopolitical risks, inflation pressures, and growth concerns. For now, the path to policy easing appears more delayed and uncertain than previously anticipated.