Morgan Stanley "delays" expectations of a Federal Reserve rate cut, with the first reduction expected in September

Morgan Stanley has revised its expectations for the Federal Reserve’s rate cuts, pushing the first expected cut from June to September, and the second from September to December. This adjustment is driven by rising oil prices caused by geopolitical conflicts in the Middle East, which are boosting inflation expectations and further constraining the Fed’s room to loosen monetary policy.

Federal Reserve Stance and Morgan Stanley’s Expectation Adjustment

Following this week’s FOMC meeting, Chair Powell explicitly stated that further confirmation of inflation’s improvement is necessary before easing policy. Morgan Stanley’s analysis indicates that the signals from the meeting show the Fed remains patient, adhering to a data-dependent approach and unwilling to act prematurely before inflation pressures are sufficiently alleviated.

Morgan Stanley describes the current stance of the Fed as overall “balanced”—policymakers must weigh still-elevated inflation against potential signs of economic slowdown. However, the firm also warns that the path toward easing is becoming increasingly uncertain, especially with ongoing external shocks such as rising oil prices fueling inflation.

Fundstrat analysts further support this view. They note that Powell has repeatedly argued over the past two years that the U.S. economy has demonstrated resilience against external shocks. Yet, market reactions suggest that Powell is “signaling a clear tightening of policy outlook.” Fundstrat states that the next key catalyst will be whether upcoming inflation data can show a visible moderation in goods prices before higher energy costs fully transmit. Until then, Powell’s framework remains unchanged: cautious, conditional, and unwilling to act solely based on forecasts.

Oil Price Inflation Effects: Key Complex Factors in the Rate Cut Path

The surge in oil prices caused by Middle Eastern conflicts is the direct catalyst for the rapid retreat of rate cut expectations. Higher energy costs are exerting pressure on the Fed on two levels:

Directly boosting inflation expectations: Rising energy prices directly increase measures like core PCE and CPI, weakening the Fed’s confidence that inflation can sustainably decline.

Delaying the normalization of inflation: Oil-driven inflation pushes make the “data-dependent” framework harder to satisfy, effectively prolonging the wait before rate cuts.

In this context, Morgan Stanley warns: “Unless economic activity shows more obvious signs of slowing, rate cuts could be further delayed or may not happen at all.” This suggests that the Fed may prioritize controlling inflation over supporting economic growth for a longer period, beyond current market expectations.

Market Reaction: From Rate Cut Hopes to “Taper Tantrum”

Senior market analyst Ed Yardeni characterizes this week’s market reaction to the Fed meeting as a “taper tantrum.” He wrote in his report: “The combination of war and Fed news triggered a taper tantrum in the stock market, as investors concluded that monetary policy might be quite limited in responding to the economic fallout from the war.”

Before the conflict, markets expected the Fed to cut rates twice—once in June and once in September—and possibly another before year-end, depending on labor market and inflation data. Now, this path has largely been abandoned, and any re-pricing of rate expectations could continue to pressure stocks and other rate-sensitive sectors.

Frequently Asked Questions

Q: Morgan Stanley pushed back the first rate cut to September. Does this mean only two cuts are certain this year?
A: Not necessarily. Morgan Stanley’s forecast provides a relatively specific scenario (one cut in September and one in December), but they also warn that if energy-driven inflation persists, this schedule could be further delayed or rate cuts may be entirely off the table. Future inflation data (especially core PCE and CPI monthly changes) and labor market performance will be key variables in determining the timing of any cuts.

Q: What does the Fed’s “basically ruling out rate cuts this year” mean for the cryptocurrency market?
A: A persistently high interest rate environment generally puts pressure on risk assets, including cryptocurrencies—higher U.S. dollar interest rates increase the opportunity cost of holding non-yielding assets and attract funds into rate-sensitive traditional assets. However, some analysts suggest that if the delay in rate cuts is driven by geopolitical-driven inflation rather than economic deterioration, Bitcoin’s narrative as an inflation hedge could be reevaluated in this specific context.

Q: Does Yardeni’s “taper tantrum” indicate larger market volatility ahead?
A: Yardeni’s description of a “taper tantrum” mainly refers to the immediate market sentiment reaction, not a definitive forecast of future volatility. Historically, taper tantrums tend to stabilize once markets adjust to new policy expectations, but this process takes time and more data confirmation. Fundstrat notes that if upcoming inflation data show limited energy pass-through, market sentiment could quickly shift, laying the groundwork for a rebound in risk assets.