A tough stretch lies ahead for the Federal Reserve. The central bank must decide whether to maintain interest rates or change course later this year.
According to analysts at Morgan Stanley, the Fed is likely to hold interest rates steady until the end of 2025. The bank argues that policymakers are currently more focused on taming inflation than responding to sluggish economic activity.
At its most recent meeting, the Fed kept interest rates at 4.25%-4.5%, noting signs of relative economic stability. Still, the central bank remains concerned about mounting risks related to both inflation and unemployment. Uncertainty is rising around the impact of President Donald Trump’s sweeping tariff agenda, Fed Chair Jerome Powell acknowledged.
The White House recently delayed the rollout of some of its new tariffs for most countries. However, experts warn this is only a temporary reprieve. Although trade tensions have eased, a broad 10% tariff on goods such as steel, aluminum, cars, and auto parts remains in place. According to economists, the United States now faces its highest effective tariff rate since the 1930s.
While some economists warn that elevated tariffs could weigh on the US economy, Morgan Stanley takes a more optimistic stance, maintaining that inflation poses a more pressing challenge for the Fed than tepid growth. The bank predicts that the decline in inflation to the Fed’s 2% target will slow as the effects of postponed tariffs intensify, peaking in late 2025.
Against this backdrop, Morgan Stanley forecasts that the Fed will resume its easing cycle in March 2026, eventually lowering interest rates below the so-called "neutral level." This is the point at which monetary policy neither stimulates nor restrains economic growth.
