Morgan Stanley: Fed Won't Raise Rates in 2026
Taylor Wilson
Morgan Stanley holds its base case that the Fed will not raise rates at all in 2026, anchored by inflation readings set to fall further after a methodology revision — a call that clashes openly with markets pricing a hike before October.
Why is Morgan Stanley betting against the market?
Chief global economist Seth Carpenter cites two pillars: the bank's inflation forecast runs well below the FOMC's (Federal Open Market Committee — the Fed's rate-setting body) median projection, and an upcoming methodology revision to PCE inflation (the Fed's preferred price gauge) is expected to push readings even lower.
This means → if the inflation numbers themselves are falling, the Fed has no pressing reason to hike.
Last week's nonfarm payrolls report added support — the labor market is not overheating, giving the Fed room to stay patient.
What signals is new Chair Warsh sending?
New Fed Chair Kevin Warsh spoke at the ECB's Sintra forum, echoing the tone of his inaugural press conference: a strong commitment to price stability, but a deliberate refusal to map out a specific policy path.
Carpenter flagged two shifts. First, Warsh's language on the "dual mandate" (prices *and* jobs) has grown more balanced — he now acknowledges the full-employment goal more explicitly, moving away from a near-exclusive focus on inflation.
Second, Warsh stressed that this policy meeting — combined with falling oil prices — has already pushed down market-implied inflation expectations and term premium (the extra yield investors demand for holding longer-dated bonds), and that an internal "working group" is still being assembled. This means → a July hike looks unlikely.
Does "AI brings deflation and rate cuts" actually hold up?
Carpenter directly challenged this popular reasoning.
His counter-logic chain: AI raises productivity → consumption and investment both rise → stronger demand → the equilibrium interest rate r* (the "ideal" rate that keeps the economy neither too hot nor too cold) goes up, not down.
In plain terms = higher efficiency doesn't mean everyone sits back — people spend more and invest more, making the economy run hotter. In that world, rates have no reason to fall.
How will this standoff between Morgan Stanley and the market resolve?
Markets have already priced a rate hike before October; Morgan Stanley insists on no hike all year — a clear expectations gap.
This means → every upcoming inflation print and FOMC minutes release becomes a referee's whistle for this debate.
In plain terms = the data will decide who's right — but until that verdict arrives, the gap itself will move bond and rates-market pricing.
Content is for reference only, not financial advice.