Morgan Stanley interprets the FOMC minutes: overall leaning toward rate cuts, but ultimately depends on tariff transmission.

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Morgan Stanley's Chief US Economist Michael Gapen's team released the latest Fed Tracker report on April 8, providing a word-for-word analysis of the March FOMC meeting minutes.

The key conclusion is clear: the overall tone of the minutes is more balanced than the press conference, and the policy path remains inclined toward rate cuts. However, the transmission effect of tariffs on core goods prices will be the key premise for whether the Fed can take action.

Core Judgment: Rate-cut Tendency Still Dominates

Morgan Stanley believes the most crucial sentence in the minutes is: "Most" members believe the Middle East situation will drive further rate cuts, while "Many" members think the situation could lead to rate hikes.

Analysts explicitly point out that in the Fed's wording system, "Most > Many"—support for rate cuts remains stronger than for rate hikes. Accordingly, Morgan Stanley maintains its baseline forecast of one rate cut each in September and December but warns that risks lean toward "later, fewer, or even none at all."

Minutes More Balanced Than Press Conference

Morgan Stanley notes that the March press conference was interpreted by the market as more hawkish mainly because questions were heavily focused on inflation—around 18 questions revolved around inflation, oil prices, and tariffs, while questions about the labor market were only around 5. Powell was repeatedly forced to reaffirm upside risks to inflation.

In contrast, the minutes are more balanced in terms of two-way risks:

"Vast majority" of members see downside risks to employment, "many" point out that low job creation makes the economy more vulnerable to shocks; "most" members believe that continued Middle East tensions will suppress business sentiment and drag down hiring.

Tariff Transmission: Precondition for Rate Cuts

Morgan Stanley especially emphasizes that "whether it’s possible to see through oil-price-driven inflation" highly depends on whether the transmission of tariffs has concluded.

When Powell was asked about this at the press conference, his first reaction was tariffs and core goods prices.

The minutes show the committee takes the same stance—only after the effects of tariffs and oil price shocks "fade," can inflation return to the 2% target.

Two Unresolved Issues

Morgan Stanley believes the minutes remain silent on two key revisions: First, in the March Summary of Economic Projections (SEP), members raised their growth forecasts for 2026-2028 by 0.1-0.3 percentage points, and long-term potential growth was also revised upward, but the minutes provide no explanation for this.

Second, "some" (about 4 or 5) members lean toward "two-way" rate guidance in the statement, a stance that is not in the majority but is certainly not marginal. Morgan Stanley says it will continue to monitor Fed communications going forward.

Overall, Morgan Stanley concludes that the Fed's current strategy is "wait and see," and the transmission effect of tariffs on core goods prices will ultimately decide whether rate cuts happen this year.

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