Investing.com -- Morgan Stanley has shifted its outlook for U.S. monetary policy, now expecting the Federal Reserve to hold rates steady for the remainder of 2026 before cutting in early 2027, following the April Federal Open Market Committee meeting.

Analyst Michael Gapen revised the firm's forecast after the FOMC left its policy rate unchanged while signaling a clear drift away from an easing bias.

Morgan Stanley had previously expected rate cuts in September and December of this year. The firm now looks for two 25-basis-point cuts in January and March of 2027, bringing the terminal target range to 3.0%–3.25%.

The FOMC statement upgraded its characterization of inflation from "somewhat elevated" to "elevated," and three members dissented in favor of removing the easing bias entirely.

Morgan Stanley viewed those dissents as significant. "Risks to our view of two rate cuts this year are clearly skewed in the direction of a Fed on hold through year-end," Gapen wrote.

Morgan Stanley also cited Fed Chair Jerome Powell's repeated acknowledgment that the center of the committee is moving toward a more neutral stance as a key signal.

The bank noted that elevated inflation, a resilient economy and rising energy prices have raised the bar for easing.

"With the Fed signaling it almost moved to symmetrical policy rate guidance this month and emphasizing patience, we now look for two rate cuts, in January and March of 2027," Gapen wrote.

Morgan Stanley added that a change in forward guidance at the June meeting remains possible.