MW Why Morgan Stanley shifted its call on Federal Reserve rate cuts after the FOMC meeting

By Jules Rimmer

Wall Street bank pushes back its expectations of two rate cuts to 2027

The Fed will push back rate cuts into next year, according to Morgan Stanley.

After Wednesday's meeting of the Federal Reserve Open Markets Committee, Morgan Stanley has shifted its outlook, pushing back its forecast for two quarter-point rate cuts this year into next year.

The problem, given recent events in the Strait of Hormuz, is "a stickier path for core inflation." In a report published Thursday, Morgan Stanley's chief economist Michael Gapen led the researchers' response to the last Fed meeting to be chaired by Jerome Powell. The clearest observation they make is that "the Committee is moving from an easing bias to a more neutral stance" and that "disinflation requires proof, the economy is strong enough, and policy is already near neutral, reducing urgency."

The meeting was not just notable for it being Powell's last before Trump nominee Kevin Warsh takes over, assuming he gets confirmed by the U.S. Senate as expected, but also because of the clear divisions on the board. Former Trump administration member Stephen Miran voted in favor of easing but three members of the board were far more hawkish and lobbied for the removal of an easing bias in the accompanying statement.

Morgan Stanley's Gapen observes, "the center of the committee is shifting away from an easing bias, even though the guidance has not yet moved." The rate markets have moved, though. The probability that rates will stay the same until the end of the year now stands at 83.6%, according to the CME's FedWatch tool, versus 75.9% last week.

The yield on the 2-year Treasury BX:TMUBMUSD02Y fell 4 basis points on Thursday after climbing as high as 3.96% after the FOMC decision.

Distribution of rate-cut pricing in December 2026 as implied by fed funds futures

Morgan Stanley's instinct to merely delay the rate cuts rather than to abandon them completely stems from an expectation of "deceleration in core inflation as the tariff impulse fades, shelter inflation slows and seasonality biases sequential inflation lower over the remainder of 2026." Gapen acknowledges, however, that "if oil prices remain elevated for longer without signs of normalization, energy spillovers into core inflation could be more significant than we currently anticipate."

Brent crude (BRN00)moved to a fresh four-year high on Thursday.

So how does Morgan Stanley recommend investors respond to the new rate outlook? The team favors exposure to 5-year Treasury notes BX:TMUBMUSD05Y and 5-year Treasury Inflation-Protected Securities .

Morgan Stanley also sees an opportunity for traders to make bets on the yield spread widening between U.S. 7- BX:TMUBMUSD07Y- and 30-year BX:TMUBMUSD30YTreasurys.

The other interesting finding of the research note is that Morgan Stanley forex strategists reckon that the euro vs. the dollar (EURUSD) has now decoupled from interest rate differentials and is instead driven at present by events in the Middle East and the dollar's safe-haven allure.

In time, Morgan Stanley expects the rate differentials to reassert themselves, once the conflict de-escalates. If a deal between the Americans and the Iranians is forthcoming then the team expects the euro to fall to $1.12 but once the situation in the Gulf stabilizes then the ongoing shift in yields is likely to swing in favor of the euro. Right now, the forex markets are pricing in an expectation of 83 basis points of rate hikes from the ECB in 2026.

The euro, ahead of Thursday's ECB decision, was trading at $1.1678.

-Jules Rimmer

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April 30, 2026 05:10 ET (09:10 GMT)

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