If you've been waiting for the Federal Reserve to start cutting interest rates, you may need to wait a bit longer. Morgan Stanley became the latest major Wall Street firm to push back its rate cut expectations, now forecasting the first reduction in June 2026 rather than January—a significant shift that reflects the Fed's determination to avoid repeating the mistakes of the 1970s, even as inflation continues to moderate.

The timing adjustment comes on the same day that December's Consumer Price Index showed core inflation falling to 2.6% year-over-year, the lowest reading since March 2021. Under normal circumstances, such data might accelerate the Fed's easing cycle. Instead, it merely confirmed what futures markets have been pricing for weeks: the central bank is in no hurry to cut.

The New Rate Cut Timeline

Morgan Stanley's updated forecast reflects the emerging Wall Street consensus:

  • June 2026: First 25 basis point cut (down from January expectations)
  • September 2026: Second 25 basis point cut
  • Year-End 2026: Fed funds rate at 3.75%-4.00% (down from current 4.25%-4.50%)

This represents a dramatic shift from just six months ago, when many forecasters expected the Fed to cut rates four or more times in 2026. The strong labor market, resilient consumer spending, and sticky services inflation have combined to keep the Fed cautious.

"The Fed has made clear that it's willing to tolerate rates staying higher for longer to ensure inflation is durably controlled. Today's CPI data, while encouraging, doesn't change that fundamental posture."

— Morgan Stanley economic research note, January 2026

What Today's CPI Report Actually Shows

Tuesday's inflation report contained something for both hawks and doves:

The Good News

  • Core CPI: Rose just 2.6% year-over-year, below the 2.8% consensus forecast and the lowest since March 2021.
  • Monthly Core: Increased only 0.2%, suggesting disinflation momentum is building.
  • Goods Deflation: Prices for physical goods continue to decline, providing a tailwind for overall inflation.

The Bad News

  • Headline CPI: Rose 2.7% annually, unchanged from November and still above the Fed's 2% target.
  • Services Inflation: Remains elevated at approximately 4%, driven by housing costs and wages.
  • Recreation Prices: Surged by the largest monthly amount in 32 years, suggesting demand remains strong.

The mixed picture explains why markets rallied initially on the core CPI beat, then gave back gains as investors recognized that the data wasn't sufficiently disinflationary to change the Fed's calculus.

The Fed's Calculus

Federal Reserve officials have been remarkably consistent in their messaging: they want to see sustained progress on inflation before cutting rates, and they're willing to accept slower economic growth as the price of price stability.

The December jobs report, which showed only 50,000 jobs created but unemployment falling to 4.4%, reinforced this cautious approach. The labor market is cooling but not collapsing, giving the Fed room to wait.

Additionally, the political uncertainty surrounding Chair Jerome Powell—with a DOJ investigation ongoing and his term expiring in May—may be contributing to institutional caution. A Fed under political pressure is unlikely to take aggressive policy actions that could be second-guessed.

Market Implications

The delayed rate cut timeline has several implications for investors:

For Bonds

Treasury yields remain elevated, with the 10-year note yielding approximately 4.18%. If rate cuts don't arrive until June, bond investors face months of relatively high carry but limited price appreciation potential.

For Stocks

Equity markets have largely adjusted to the "higher for longer" narrative, with the S&P 500 hitting record highs despite delayed rate cut expectations. However, rate-sensitive sectors like real estate and utilities may continue to underperform.

For Mortgages

Homebuyers hoping for lower mortgage rates may need to adjust expectations. While the 30-year fixed rate has fallen to approximately 5.86%—helped by Treasury purchases under the White House's mortgage initiative—further declines may be limited without Fed rate cuts.

The Fed Governor Miran Factor

Adding complexity to the outlook, Fed Governor Stephen Miran has publicly advocated for 150 basis points of rate cuts in 2026—far more aggressive than the consensus forecast. Miran's dovish stance has created visible disagreement within the Fed, though his position appears to be a minority view.

The January 27-28 FOMC meeting will provide the next official reading on Fed thinking. Futures markets price virtually no chance of a cut at that meeting, with June remaining the most likely timing for the first reduction.

What to Watch

For investors trying to anticipate the Fed's next move, several data points will be crucial:

  • January Jobs Report (February): A significant weakening in employment could accelerate the rate cut timeline.
  • February CPI (March): Continued core inflation progress below 2.5% would strengthen the case for earlier cuts.
  • Fed Chair Nomination: Trump's choice to replace Powell (if he chooses not to reappoint) could signal a more dovish policy direction.

Until then, the message from Wall Street is clear: patience. The Fed isn't cutting rates anytime soon, and investors should plan accordingly.