Oil Prices Surge, Impacting Market Rate Cut Expectations; Morgan Stanley Still Expects Fed Rate Cut in June

Why does AI · Morgan Stanley insist on a rate cut prediction in June?

Source: Global Market Report

Morgan Stanley maintains its forecast that the Federal Reserve will restart rate cuts in June and cut rates again in September, despite soaring oil prices prompting traders to reduce expectations for rate cuts this year.

Michael Gapen, Morgan Stanley’s Chief U.S. Economist, said Monday during a Bloomberg roundtable in New York, “We still believe there is a risk of delays in June and September.”

This forecast contrasts with market pricing. The sharp rise in oil prices following the Iran conflict could reignite inflation, potentially limiting the Fed’s room to ease monetary policy, leading the market to quickly lower expectations for rate cuts.

Futures tied to the Federal Reserve’s policy rate currently expect a 25 basis point cut in December. The market sees a 60% chance of a 25 basis point cut in September. Economists at TD Securities and Barclays also pushed back their expectations for the Fed’s next rate cut from June to September last week.

Gapen said that, of course, the central bank might delay its first rate cut until September or even December, and in either case, the next rate cut could be postponed until 2027.

He stated, “The main risk to our view is that the longer the Fed waits, the more likely it is that they will need to implement an additional rate cut afterward.”