Analyst Michael Gapan revised the company's forecast after the FOMC left the interest rate unchanged, while signaling a clear shift away from policy easing.

Previously, Morgan Stanley expected interest rate cuts in September and December of this year. Now, the company predicts two 25-basis-point cuts in January and March 2027, leading to a final target range of 3.0% to 3.25%.

In the FOMC statement, the characterization of inflation was changed from "slightly elevated" to "elevated," and three members of the committee dissented, advocating for the complete removal of the easing bias.

Morgan Stanley considered these dissents to be significant. "The risks to our forecast of two rate cuts this year are clearly tilted towards the Fed maintaining its current policy until the end of the year," Geppen wrote.

Morgan Stanley also highlighted Federal Reserve Chairman Jerome Powell's repeated acknowledgment that the committee's center is moving towards 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 policy easing.

"Given that the Fed is signaling that it is almost on track to achieve symmetric interest rate targets this month and emphasizing patience, we now anticipate two rate cuts in January and March 2027," Geppen wrote.

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