On Thursday, April 30th, following the conclusion of the Federal Reserve's policy meeting, financial markets once again focused on the adjustment of the interest rate path. The Federal Open Market Committee decided to maintain the target range for the federal funds rate at 3.5% to 3.75%, a rare instance of disagreement, with several policymakers opposing a continued accommodative stance. International oil prices rose concurrently, with Brent crude reaching around $110 per barrel, primarily due to the ongoing tensions in the Middle East, putting pressure on the energy supply chain. Against this backdrop, Morgan Stanley quickly revised its forecast, abandoning its previous expectation of two 25-basis-point rate cuts by the Fed in 2026, and instead expecting interest rates to remain unchanged throughout the year. This shift reflects a reassessment of inflation stickiness and economic resilience by institutions, providing traders with a new framework for the monetary policy outlook.

The underlying logic behind Morgan Stanley abandoning its expectation of a 2026 rate cut

Morgan Stanley previously predicted that the Federal Reserve would implement 25 basis point rate cuts in September and December, but its latest report indicates that the institution has completely reversed its prediction, believing that the Fed will not adjust interest rates in 2026. This forecast adjustment is mainly based on the fact that current inflationary pressures remain at a high level and recent economic data continues to show resilience. The annualized consumer price index rose to 3.3% in March, a significant rebound from 2.4% in February, with energy prices being the main driver. Analysts point out that even if geopolitical conflicts ease in the short term, the previous rise in energy costs has already had a lasting impact on prices, and a second round of transmission could further push up wages and core inflation expectations.

The Federal Reserve emphasizes a "data-dependent" principle rather than a predetermined path when assessing data. Morgan Stanley's recent shift is highly consistent with pricing in the federal funds futures market, which indicates that interest rates will remain largely stable throughout 2026, with only a slight tendency to rise in 2027. This consistency reinforces the market consensus of a wait-and-see policy stance, while highlighting the limitations of monetary policy flexibility under supply shocks. Economic resilience is manifested in a stable job market and robust consumer spending; even fluctuations in oil prices have not triggered a significant contraction in demand, further supporting the Fed's decision to maintain the current interest rate range.

Geopolitical tensions drive the transmission of oil price and inflationary pressures.

The situation in the Middle East has disrupted shipping through the Strait of Hormuz, leading to a significant increase in oil prices this week. Brent crude has climbed sharply from pre-conflict levels, while WTI crude has followed suit, reaching around $100 per barrel. The rise in energy prices directly contributed to a 0.9% increase in the March Consumer Price Index (CPI), a relatively high level in recent years.
The following is a comparison of key components of recent US inflation:

index	March 2026 annual rate	February 2026 annual rate	Main driver
Overall CPI	3.3%	2.4%	Energy prices rebound
Core CPI	2.6%	2.5%	Mild upward trend
Energy sub-item	12.5%	—	Gasoline and fuel oil prices rise

This transmission mechanism puts pressure on the supply chain. Rising transportation and manufacturing costs may gradually seep into the prices of consumer goods and services, creating sticky inflation. Even after the conflict ends, inventory rebuilding and adjustments to alternative supplies will take time, and price pressures will be difficult to dissipate quickly.

Economic resilience supports the Federal Reserve's policy stance.

Recent economic data indicates that the US economy has demonstrated strong resilience in the face of external shocks. While the job market has shown some signs of slowing, it remains generally stable, and consumer spending has not declined significantly. The minutes of the Federal Reserve meeting show that policymakers are concerned about the balance of risks, being wary of both rising inflation and potential downward pressure on growth. Some officials explicitly opposed maintaining further easing, reflecting a cautious consensus within the government regarding the policy path.

In a high oil price environment, economic resilience means that demand has not contracted rapidly due to rising energy costs; instead, corporate pricing power and inventory management have buffered some of the impact. This dynamic makes the Federal Reserve more inclined to data-driven decision-making rather than premature easing.

Powell's Retention and Continuity of Monetary Policy

Federal Reserve Chairman Jerome Powell stated at his final press conference as chairman yesterday that his term as chairman will end on May 15, but he will continue to serve on the Board of Governors until January 2028, with the exact length of his term yet to be determined. He emphasized, "What I'm really concerned about is the series of legal attacks against the Federal Reserve, which threatens our ability to conduct monetary policy without considering political factors." Powell pointed out that the Federal Reserve needs to continue making decisions based on rigorous analysis and maintain its institutional independence through laws and practices.
This decision maintains policy continuity, avoids an immediate vacancy on the board, and reinforces market expectations of the Federal Reserve's independent operation. Traders are focused on how this arrangement will affect future policy communication and whether it will change market pricing in policy predictability. Powell also stated that he will fulfill his duties as a governor in a low-key manner, emphasizing that the sole chairman will be his successor.

Frequently Asked Questions

Question 1: Why did Morgan Stanley suddenly abandon its 2026 interest rate cut forecast?
A: Morgan Stanley's core reason for adjusting its forecast is that inflation stickiness has exceeded previous expectations. The March consumer price index rose to 3.3% year-on-year, and energy prices rebounded sharply due to geopolitical tensions, making it difficult for overall inflationary pressures to subside quickly. Even if economic data shows resilience, supply-side shocks have created a second round of transmission risks, such as rising transportation costs pushing up core prices. The institution believes that the Federal Reserve needs more evidence to confirm a stable inflation path; therefore, maintaining interest rates unchanged throughout the year is in line with the data-dependent principle. This shift is consistent with federal funds futures pricing, reflecting the market's realistic reassessment of the policy path.

Question 2: What is the background and potential impact of Powell's decision to remain a member of the Federal Reserve Board of Governors?
A: Chairman Powell's term ends on May 15, but his term as a governor extends to January 2028. He has made it clear that he will remain in office to ensure the investigation into the Federal Reserve is fully concluded, transparent, and final, while expressing concern that political factors may interfere with the independence of monetary policy. Traders are focused on whether this will affect the tone of future communications and the potential changes in decision-making dynamics after the successor takes office.