According to analysts at Morgan Stanley, the Federal Reserve is forecasted to keep interest rates unchanged for the remainder of this year, as policymakers focus more on controlling inflation rather than weak economic activity.
At its latest meeting, the Fed kept interest rates at 4.25% to 4.5%, noting signs of relative resilience in the economy.
However, the central bank still expressed concerns about rising risks from price growth and unemployment, particularly as Jerome Powell, the Fed Chair, pointed to uncertainties surrounding the impact of President Donald Trump's comprehensive tariff program.
Although the White House has recently delayed some higher tariffs on most countries, this pause is only temporary and will expire in the coming months. Even as trade tensions have eased, the blanket 10% tariff and tariffs on items such as steel, aluminum, cars, and auto parts remain in place. According to some estimates, the effective tax rate in the U.S. is at its highest level since the 1930s.
Economists have warned that high tariffs could impact the world's largest economy. However, in a report sent to clients, Morgan Stanley analysts argued that the Fed is likely to view inflation as a "bigger issue" compared to weak growth.
"While we expect global inflation to gradually decrease, the United States is different from the rest of the world due to the imposition of tariffs," the brokerage firm said. In the U.S., the downward trend in inflation towards the Fed’s 2% target is expected to be interrupted by "some impacts from peak tariffs" by the end of 2025.
In this context, analysts predict that the Fed will restart its easing cycle in March 2026 and "will eventually cut" below the "neutral" interest rate - the level that neither supports nor hinders growth.
