The US Federal Reserve is expected to keep interest rates at current levels throughout the year as policymakers focus more on controlling inflation than slowing economic activity, according to analysts at Morgan Stanley.
In its latest meeting, the Fed kept interest rates in a range of 4.25% to 4.5%, citing signs of relative resilience in the overall economy.
However, the central bank also voiced concerns about rising risks from inflation and unemployment. Fed Chairman Jerome Powell also warned of the uncertainty stemming from President Donald Trump’s large-scale tariff agenda.
While the White House recently suspended some of the high tariffs on most countries, the suspension is only temporary and is expected to expire in the coming months. Despite the easing of trade tensions, a universal 10% tariff on goods such as steel, aluminum, vehicles and parts remains in place. By some estimates, the US effective tariff rate is now at its highest level since 1930s.
Economists have warned that the high tariffs could weigh on the world’s largest economy. But in a note to clients, Morgan Stanley analysts argued that the Fed is more likely to view inflation as a “bigger problem” than slowing growth.
“While we expect global inflation to eventually decline, the United States is different from other countries because of the implementation of tariffs,” the brokerage said. In the US, any decline in inflation towards the Fed’s 2% target is expected to be hampered by “side effects from escalating tariffs” by the end of 2025.
In this context, analysts expect the Fed to restart its easing cycle in March 2026, and “eventually cut rates” beyond the “neutral” level, a level that neither supports nor hinders growth.
