Morgan Stanley pushes Fed cut forecast to Jan/March 2027, citing sticky inflation and hawkish FOMC drift.
Morgan Stanley pushes Fed cut forecast to Jan/March 2027, citing sticky inflation and hawkish FOMC drift. Euro seen decoupled from rate differentials on Middle East risk; dollar safe-haven bid dominates.
Terminal rate seen at 3.0-3.25% Justin had the breaking on this yesterday: Morgan Stanley scraps call for Fed rate cuts this year More detail now: Summary: Morgan Stanley has revised its Federal Reserve forecast, dropping expected September and December 2026 cuts and now looking for two 25 basis point reductions in January and March 2027, with a terminal range of 3.0% to 3.25% The revision follows the April FOMC meeting, at which three board members dissented in favour of removing the easing bias entirely, and the statement upgraded its inflation characterisation from “somewhat elevated” to “elevated” Chief economist Michael Gapen wrote that the committee is moving from an easing bias toward a neutral stance, with disinflation needing to be proven before cuts can be justified Rate futures now price an 83.6% probability of no change through year-end, up from 75.9% the prior week, per CME FedWatch data Morgan Stanley’s base case for eventual cuts rests on expected deceleration in core inflation as the tariff impulse fades, shelter inflation slows and seasonal factors weigh on sequential readings through the rest of 2026 The bank flagged that if oil prices remain elevated without signs of normalisation, energy spillovers into core inflation could prove more significant than currently anticipated On foreign exchange, Morgan Stanley strategists said the euro against the dollar has decoupled from interest rate differentials and is currently driven by Middle East developments and the dollar’s safe-haven status The bank expects rate differentials to reassert themselves once the conflict de-escalates; a US-Iran deal could push the euro toward $1.12, but a broader Gulf stabilisation would ultimately favour the euro given the yield shift underway Markets are currently…