Morgan Stanley, one of Wall Street's largest investment banks, is pushing back against the idea that the Federal Reserve will need to raise interest rates again this year. In a new research note, the bank argues that falling energy prices and cooling inflation will allow the central bank to keep its benchmark rate unchanged through the end of 2024 — even after Fed officials recently signaled a higher long-run rate path.
What the Fed just did
The Federal Reserve held interest rates steady for the fourth consecutive meeting earlier this month, keeping the federal funds rate in a range of 5.25% to 5.50%. But the central bank's latest Summary of Economic Projections (SEP) — the quarterly forecast roundup from Fed officials — showed a notable shift. The median projection for the fed funds rate at the end of 2026 rose to 3.8%, up from 3.4% in March. That move was widely interpreted as a more hawkish stance, suggesting policymakers expect rates to stay higher for longer.
Morgan Stanley, however, thinks that message may be temporary. The bank points to several forces that could bring inflation down faster than the Fed's own forecasts assume — and that could keep the central bank on the sidelines for the rest of the year.
Why energy prices matter
A key part of Morgan Stanley's argument centers on energy costs. Crude oil prices have fallen sharply in recent weeks, with West Texas Intermediate (WTI) crude dipping below $70 a barrel. Lower energy prices feed into inflation in two ways: directly, by reducing what consumers pay at the pump and for heating, and indirectly, by lowering transportation and production costs across a wide range of goods.
For context, oil prices have tumbled amid easing geopolitical tensions and concerns about global demand. Oil prices tumbled 3% as WTI fell below $70 recently, and prices hit a four-month low after tanker traffic resumed in the Strait of Hormuz, a key chokepoint for global crude shipments. These moves have helped cool headline inflation measures.
Morgan Stanley also expects earlier price bumps from tariffs to fade, and it sees shelter inflation — the cost of housing, which has been a stubborn driver of overall inflation — continuing to ease. At the same time, the bank forecasts that job growth will slow enough to keep the labor market from overheating, removing another potential reason for the Fed to tighten policy.
The inflation picture so far
The latest data shows core Personal Consumption Expenditures (PCE) inflation — the Fed's preferred measure — rose 0.3% in May. That's still above the central bank's 2% target, but Morgan Stanley believes the trend will soften in the months ahead as the effects of lower energy prices ripple through the economy.
If inflation does cool faster than the Fed's projections imply, the case for holding rates steady becomes stronger. The bank's view is that the Fed can afford to wait — neither cutting rates prematurely nor hiking further — as long as inflation continues to drift lower and the labor market remains balanced.
What it means for investors
Morgan Stanley's analysis also highlights an important nuance in the Fed's dot plot — the chart that shows each official's individual rate forecast. The dot plot is often treated as a roadmap for future policy, but it's really a collection of personal projections, not a committee consensus.
The bank notes that several of the more hawkish dots for 2026 — the ones pointing to higher rates — may come from regional Federal Reserve Bank presidents who are not voting members of the Federal Open Market Committee (FOMC) this year. FOMC votes rotate annually among the 12 regional bank presidents, so nonvoters' views carry less weight in actual policy decisions.
If that's correct, the headline shift to a 3.8% median rate for end-2026 may say more about internal debate than about what's likely to happen at the next few meetings. That distinction matters most for short-term rate markets: fed funds futures and 2-year Treasury yields can stay tied to "hold" expectations unless upcoming inflation data convinces the year's actual voters that policy needs to tighten.
For everyday investors, the key takeaway is that interest rate uncertainty remains high, but the balance of risks may be shifting. If Morgan Stanley is right, the Fed's next move could be a cut — but not until 2025 at the earliest. In the meantime, investors should watch energy prices and monthly inflation reports closely, as those will be the biggest drivers of whether the "hold" scenario holds up.
For more on how energy markets are influencing the inflation outlook, see our coverage of how falling oil prices are weighing on commodity markets and how hot PCE inflation data is fueling Fed uncertainty.
