UPDATE 1-Morgan Stanley sees Fed holding rates steady in 2026

The Fed held ‌its policy rates on Wednesday in a sharply divided decision, the most split since 1992, that pushed U.S. Treasury yields to their highest in a month and lifted the dollar ‌to a two-week high. Inflation remains above the Fed's 2% target, and recent economic data point ‌to continued strength in growth and labour markets, reducing the urgency for further policy easing, the Wall Street brokerage said in a note issued after the Fed decision.

Morgan Stanley ​on Wednesday said it now expects the ​U.S. Federal Reserve to start ‌cutting ​rates only next year, dropping its earlier call for cuts in 2026, due to stubborn inflation and economic resilience. The Fed held ‌its policy rates on Wednesday in a sharply divided decision, the most split since 1992, that pushed U.S. Treasury yields to their highest in a month and lifted the dollar ‌to a two-week high.

Inflation remains above the Fed's 2% target, and recent economic data point ‌to continued strength in growth and labour markets, reducing the urgency for further policy easing, the Wall Street brokerage said in a note issued after the Fed decision. "The bar for cuts is higher and the Fed ⁠seems prepared ​to wait," the bank ⁠said, adding that policymakers are likely to proceed cautiously as they assess the lagged effects of earlier tightening and ⁠the durability of recent disinflation trends. The brokerage forecast rate cuts in January and March as inflation ​pressures ease more convincingly and growth slows toward trend. Earlier this month, Deutsche Bank ⁠said it expects the Fed to keep interest rates unchanged in 2026, citing still-elevated inflation and a cautious policy ⁠stance. Traders ​are now pricing in roughly a 44% probability of a rate increase by April 2027, up from about 8% before the Fed announced its decision, according to CME ⁠Fedwatch. Several Fed officials said earlier this month that the war in the Middle East has ⁠already added to ⁠inflationary pressures, while heightened uncertainty has made it harder for the central bank to clearly signal its next steps on interest rates.