Synopsis:

Morgan Stanley has revised its Fed outlook, now expecting no rate cuts in 2025, citing tariff-induced inflation and Fed Chair Powell’s commitment to anchoring expectations.

Key Points:

• No Fed cuts in 2025:
  Tariffs are expected to elevate inflation, keeping the Fed on the sidelines for the remainder of the year.

• Powell emphasizes inflation vigilance:
  In Friday’s speech, Powell reiterated the Fed’s focus on preventing a one-time price shock from turning into persistent inflation, aligning with a more hawkish hold stance.

• Strong payrolls support policy pause:
  March jobs data was robust, adding to the Fed’s confidence in holding rates steady despite market concerns over growth.

• Markets not yet pricing recession:
  While risk assets reacted sharply to the tariffs, Morgan Stanley sees no imminent recession priced in, though market anxiety over growth is clearly rising.

Conclusion:

Morgan Stanley now sees persistent inflation pressures, driven by tariffs, as the dominant macro factor for the Fed, supporting a no-cut stance through 2025. While markets are nervous, they’re not yet pricing a full-blown recession, making a prolonged Fed pause more likely.