Fed Rate Hike Outlook: Morgan Stanley Sees No Rate Increase in 2026 Despite Inflation Risks

Morgan Stanley expects the U.S. Federal Reserve to keep interest rates unchanged for the rest of 2026, although the Wall Street bank cautioned that persistent inflation or a stronger labor market could still force policymakers to consider a rate hike. Minneapolis Federal Reserve President Neel Kashkari has also warned that elevated inflation remains a key concern and said he expects the Fed may need to tighten monetary policy if price pressures fail to ease.

Morgan Stanley stated that its base-case forecast remains unchanged, with the Federal Reserve holding rates steady throughout the year. However, the bank identified two major risks that could alter that outlook: the unemployment rate falling below 4% and inflation remaining stubbornly high.

Recent inflation data has fueled those concerns. The latest U.S. Personal Consumption Expenditures (PCE) inflation reading climbed to 4.1%, marking its highest level since 2023 and reinforcing fears that inflationary pressures are proving more persistent than expected.

Despite the hotter inflation data, falling oil prices following the U.S.-Iran peace agreement could help ease energy costs and reduce overall inflation. Lower fuel prices have strengthened expectations that the Fed may not need to raise interest rates this year.

Not everyone shares that outlook. Bank of America forecasts three Fed rate hikes beginning with the September Federal Open Market Committee (FOMC) meeting, followed by additional increases at the October and December meetings.

Market participants also remain divided. According to Polymarket, traders currently assign a 53% probability that the Federal Reserve will raise interest rates before year-end, with September viewed as the most likely starting point. CME FedWatch data similarly indicates growing expectations for a rate increase, showing a 47.3% chance of a hike at the September FOMC meeting.

Speaking in an interview with Bloomberg, Minneapolis Fed President Neel Kashkari revealed that he was among the policymakers who projected at least one rate hike this year. He explained that widespread inflationary pressures across the U.S. economy—not just geopolitical tensions or disruptions to global oil supplies—were behind his decision.

Following the June FOMC meeting, the Federal Reserve adopted a more hawkish tone. Updated economic projections showed that nine of the 18 Fed officials anticipated at least one interest rate hike this year, while six of those policymakers expected multiple increases.

Kashkari emphasized that his inflation concerns extend beyond the impact of the Middle East conflict, saying broader price pressures across the economy remain the primary challenge facing the Federal Reserve as it determines the future path of U.S. monetary policy.