Investing.com - The Federal Reserve has signaled that it is prepared to look through tariff-induced inflation and ease policy to support economic growth if necessary, according to analysts at Morgan Stanley (NYSE:MS).
Earlier this week, the Fed left interest rates unchanged as widely expected at a range of 4.25% to 4.5%, although the central bank raised its inflation forecast and cut its growth outlook for 2025.
Still, Fed Chair Jerome Powell indicated that the Fed remained ready to bring down rates should economic activity show signs of softening, the Morgan Stanley analysts led by Michael Gapen flagged in a note to clients on Friday.
"We agree this is the right idea, but may be hard to execute in practice, particularly for a Fed that is data dependent," the analysts said.
The brokerage added that, should the Fed rely on economic figures to guide its decision-making process, officials "may find it hard to ease in the face of rising inflation."
Economists have warned that U.S. President Donald Trump’s plans to impose sweeping tariffs on friends and adversaries alike could refuel price gains and potentially spark a slowdown in growth.
Such a scenario of stubborn inflation and tepid growth may complicate the rate path ahead for Fed policymakers, the analysts noted. The Fed pushed pause on a series of policy reductions in January, arguing that Trump’s trade proposals have heightened uncertainty around the economic outlook.
While the Fed did maintain its projections of at least 50 basis points of rate cuts this year, its expectations of higher inflation cast some doubt over this forecast.
The Morgan Stanley analysts maintained their expectations for a 25-basis point cut in June, saying policymakers are "more attuned to downside risks to activity than upside risks to inflation."
However, the Fed will likely need to maintain a "moderately restrictive policy stance for longer" before it is confident that inflation has been sufficiently defeated to justify further cuts, the analysts said, reiterating their projection for "more back-loaded cuts in 2026."