April 30 (Reuters) – Morgan Stanley on Wednesday said it now expects the U.S. Federal Reserve to start cutting rates only next year, dropping its earlier call for cuts in 2026, due to stubborn inflation and economic resilience.
The Fed held its policy rates on Wednesday in a sharply divided decision, the most split since 1992, that pushed U.S. Treasury yields to their highest in a month and lifted the dollar to a two-week high.
Inflation remains above the Fed’s 2% target, and recent economic data point to continued strength in growth and labour markets, reducing the urgency for further policy easing, the Wall Street brokerage said in a note issued after the Fed decision.
“The bar for cuts is higher and the Fed seems prepared to wait,” the bank said, adding that policymakers are likely to proceed cautiously as they assess the lagged effects of earlier tightening and the durability of recent disinflation trends.
The brokerage forecast rate cuts in January and March as inflation pressures ease more convincingly and growth slows toward trend.
Earlier this month, Deutsche Bank said it expects the Fed to keep interest rates unchanged in 2026, citing still-elevated inflation and a cautious policy stance.
Traders are now pricing in roughly a 44% probability of a rate increase by April 2027, up from about 8% before the Fed announced its decision, according to CME Fedwatch.
Several Fed officials said earlier this month that the war in the Middle East has already added to inflationary pressures, while heightened uncertainty has made it harder for the central bank to clearly signal its next steps on interest rates.
(Reporting by Kanishka Ajmera and Rashika Singh in Bengaluru; Editing by Sonia Cheema and Harikrishnan Nair)
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