Morgan Stanley Interprets FOMC Minutes: Overall Leaning Toward Interest Rate Cuts, but Ultimately Dependent on Tariff Transmission

A team led by Michael Gapen, Chief US Economist at Morgan Stanley, released the latest Fed tracking report on April 8, analyzing the March FOMC minutes word-for-word.\n\nThe core conclusion is clear: the overall tone of the minutes is more balanced than the press conference, and the policy path still leans toward interest rate cuts, but the transmission effect of tariffs on core goods prices will be the key prerequisite for the Fed to act.\n\n## Core Judgment: Dovish Tendency Still Prevails\n\nMorgan Stanley believes the most critical sentence in the minutes is: "Most" members believed the situation in the Middle East would push for further interest rate cuts, while "Many" members believed the situation could lead to interest rate hikes.\n\nAnalysts explicitly point out that in the Fed's wording system, "Most > Many"—support for the direction of interest rate cuts remains stronger than for the direction of rate hikes. Based on this, Morgan Stanley maintains its baseline forecast of one interest rate cut each in September and December, while also warning that risks lean toward being "later, fewer, or even no cuts."\n\n## Minutes More Balanced Than Press Conference\n\nMorgan Stanley believes that the reason the March press conference was interpreted by the market as hawkish was largely because the questions were highly concentrated on the inflation side— approximately 18 questions focused on inflation, oil prices, and tariffs, while only about 5 questions related to the labor market, forcing Powell to repeatedly reiterate upside risks to inflation.\n\nIn contrast, the minutes are more balanced regarding two-sided risks:\n\n> "A vast majority" of members saw downside risks to employment, and "many" pointed out that low job creation makes the economy more vulnerable to shocks; "most" members believed the ongoing situation in the Middle East would suppress business sentiment and weigh on hiring.\n\n## Tariff Transmission: A Prerequisite for Interest Rate Cuts\n\nMorgan Stanley particularly emphasizes that "whether the oil-driven inflation can be looked through" depends heavily on whether the tariff transmission has ended.\n\nWhen Powell was asked about this at the press conference, his first response was regarding tariffs and core goods prices.\n\nThe minutes show that the committee as a whole holds the same position—only after the effects of tariffs and oil price shocks "fade" can inflation return to the 2% target.\n\n## Two Unresolved Questions\n\nMorgan Stanley believes the minutes remained silent on two key revisions: First, in the March Summary of Economic Projections (SEP), members raised growth forecasts for 2026-2028 by 0.1-0.3 percentage points, and the long-term potential growth rate was also revised upward, yet the minutes offered no explanation for this.\n\nSecond, "some" (about 4 to 5) members favored adopting "two-sided" interest rate guidance in the statement; while this position did not constitute a majority, it was by no means a fringe view. Morgan Stanley stated it would continue to monitor the Fed's subsequent communications.\n\nOverall, Morgan Stanley concludes that the Fed's current strategy is to "wait and see," and the transmission effect of tariffs on core goods prices will be the final variable determining whether there will be interest rate cuts within the year.