Morgan Stanley Forecasts Two Fed Hikes in 2026

Morgan Stanley now expects the Federal Reserve to raise interest rates twice in 2026. This marks a significant hawkish pivot from previous forecasts. The brokerage cites persistent inflation and high oil prices as primary drivers. Crude oil remains above $100 per barrel. This level sustains pressure on consumer prices. The Fed faces a complex policy environment under Chair Kevin Warsh. Warsh has avoided providing clear forward guidance on rate paths. Markets are heavily pricing in a rate increase at the upcoming meeting. This would be the first hike of Warsh's tenure. The move signals a commitment to containing inflationary pressures.

The European Central Bank also faces a revised outlook. Morgan Stanley expects the ECB to raise its deposit rate by 25 basis points in December. The new target level is 2.75%. This reverses the earlier view that the ECB's tightening cycle had ended. Resilient eurozone economic growth supports this stance. Higher energy prices also contribute to the decision. The brokerage has reduced its expectations for future monetary easing in Europe. Only one rate cut is now projected for 2027. That cut is expected to occur in December 2027.

Inflation Drives Policy Shift

The decline in inflation has not been consistent enough for policymakers. Confidence is lacking that price pressures are returning sustainably to target. Morgan Stanley highlights this lack of consistency as a key risk. The brokerage sees the Fed signaling the possibility of further tightening. This continues until inflationary pressures ease. The central bank aims to maintain control over price stability. Persistent demand adds to the complexity. Central banks may need to keep borrowing costs elevated for longer. This extends the period of monetary restraint.

Global Markets Brace For Tightening

Investors are preparing for policy decisions from the Fed and Bank of Japan. These decisions occur this week. The ECB's return to a tightening bias adds uncertainty. Global interest-rate outlooks face renewed volatility. Higher oil prices and persistent inflation increase risks. Borrowing costs may remain elevated longer than expected. This shift impacts bond, equity, and currency markets. Investors are reassessing the likelihood of prolonged monetary tightening. The financial landscape adapts to these new expectations. Source: GN markets/policy (en-US).