Morgan Stanley stated that the Fed could resume rate cuts as early as June, but the oil price shock triggered by the Iran war could postpone the next rate cut.

Despite the potential for rising energy prices to exacerbate inflation, the bank’s economists maintain their previous forecast that the Fed will cut rates twice this year, in June and September, each by 25 basis points. However, they believe the Fed could postpone the first rate cut to September or even December, both scenarios potentially delaying the next rate cut until 2027.

“If the Fed listens to historical experience, ignores oil price pressures, and implements easing policies sooner rather than later, then we believe we are in a favorable position,” said Michael Gapen, chief U.S. economist at Morgan Stanley, and his colleagues in a report on Wednesday.

The U.S. and Israeli attacks on Iran have significantly pushed up oil prices and triggered market volatility. This has raised doubts about when the Fed will ease monetary policy again, with the futures market currently expecting only one 25-basis-point adjustment this year, most likely at the October meeting.

Despite President Donald Trump’s repeated statements that the war with Iran will end “soon,” and the International Energy Agency’s agreement on Wednesday to release a record 400 million barrels of oil from its emergency reserves, oil prices remain high, with Brent crude trading around $90 a barrel.

Morgan Stanley economists say that if oil prices fail to recover to pre-conflict levels, overall inflation will be more significantly impacted through 2026, and unemployment will remain slightly high until the end of 2028. Before Trump launched the war, oil prices were around $70 a barrel.

“The Fed will balance this contradiction in its dual mandate with a larger-than-expected easing,” Gapen and colleagues said. “Therefore, our second risk to the monetary policy outlook is that the Fed may delay rate cuts, but the cuts will be larger.”

The economists stated, “We believe that current market pricing reflects a high degree of uncertainty about the duration of the conflict and a recognition that the Fed’s response will only become clearer with the passage of data and time.”

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