Investing.com -- The Federal Reserve is poised to keep interest rates unchanged at next week’s policy meeting, according to Morgan Stanley, which expects the central bank to “remain on hold and retain its easing bias” despite recent oil-driven inflation pressures.

Chief U.S. economist Michael Gapen wrote in a note that the firm still sees the median Fed official projecting one rate cut this year and one next year, keeping the terminal rate at 3.0%-3.25%.

“The oil price shock should mean higher headline inflation forecasts, but models and past Fedspeak suggest the Fed will look through energy price pressures,” Gapen said.

The bank expects the Fed to hold rates, with three dissents in favor of a cut, up from two in January.

Gapen noted that Governors Bowman, Waller and Miran have all signaled support for rate reductions.

“We have high conviction that the Fed will not respond with rate hikes,” he wrote, adding that appropriate policy “calls for the Fed to ‘look through’ energy price pressures … and stay on hold or cut rates if activity weakens.”

Updated projections should show higher headline inflation and softer growth, but an unchanged dot plot.

In markets, Morgan Stanley recommends a neutral stance on U.S. Treasury duration, staying long 2-year SOFR swap spreads, and remaining received in June FOMC OIS.

On currencies, the firm sees downside risks to the U.S. dollar if Chair Jerome Powell emphasizes that the Fed is looking past energy-driven inflation, though “oil market developments” will remain central to FX trading.