Podcast Summary: Thoughts on the Market

Episode: Why Fed Rate Cuts Could Be Pushed Back
Date: March 26, 2026
Host: Matthew Hornbach (Global Head of MacroStrategy)
Guest: Michael Gapen (Chief U.S. Economist, Morgan Stanley)

Episode Overview

This episode examines the implications of the March FOMC (Federal Open Market Committee) meeting for the U.S. economy and interest rates for the remainder of 2026. Matthew Hornbach and Michael Gapen discuss why the Federal Reserve is expected to delay rate cuts, the intense focus on inflation versus labor market issues in the Fed’s recent communications, the complexities presented by recent supply-side shocks (tariffs, oil prices), and implications for the U.S. Treasury market.

Key Discussion Points & Insights

1. Fed Rate Cuts Likely Pushed Later in 2026

• Revised Outlook:
  • Morgan Stanley now expects rate cuts in September and December, rather than in June and September as previously forecasted.
  • The shift is driven by increased macro uncertainty and rising oil prices putting upward pressure on headline inflation.
  • Quote [00:36], Michael Gapen:

    "We previously thought rate cuts would come in June and September. We've slid those back to September and December… it will likely take the Fed longer to conclude that disinflation is occurring."

2. Singular Focus on Inflation at the FOMC Press Conference

• Press Conference Recap:
  • Out of approximately 23 questions, 18 were about inflation or prices, only 5 about labor markets.
  • Word count analysis shows a 5:1 ratio of inflation/oil terms to labor market terms.
  • Memorable quote [01:21], Michael Gapen:

    "By a 5 to 1 ratio, the press conference was dominated by fears or concerns around inflation, inflation expectations and oil prices. Whatever message the Fed was trying to send, it's hard to send either a neutral or a dovish message when nearly every question was about inflation."

3. Fed’s Strategy on Supply-Side Shocks: Tariffs and Oil Prices

• Powell’s Approach:
  • The Fed is hesitant to look through headline inflation from oil until it’s confident tariff-related inflation has abated.
  • Classical monetary policy wisdom suggests looking through supply-side shocks, but the Fed’s approach is now more cautious.
  • Quote [02:57], Michael Gapen (paraphrasing Powell):

    “…what we have to do is get through this tariff pass through to core goods first. That I can't even tell you whether or not we want to look through an increase in headline inflation until we get greater clarity that tariff pass through to core goods has ended.”

  • This step-wise caution "raises the bar" for a rate-cut decision.

4. Context of the Fed's Inflation Target History

• Added Pressure:
  • The Fed has missed its 2% inflation target for five years, increasing the complexity of justifying looking through new inflation shocks.
  • Quote [04:33], Michael Gapen:

    "To conclude that you can look through increases in headline inflation from oil … one of the conditioning factors there is that long run inflation expectations remain stable and well anchored over around the Fed's 2% target."

5. Market Reaction to FOMC Messaging

• Market Takeaways:
  • After the FOMC meeting, the market priced only a 50% chance of a December rate cut, at one point even briefly pricing in the possibility of a rate hike.
  • The reluctance to cut rates is rooted in the Fed's checklist approach—waiting to see both the end of tariff-related inflation and a firm anchoring of long-term expectations.
  • [05:19], Matthew Hornbach:

    "That really increases the chance the Fed doesn't ease at all this year."

6. Fed’s View on Inflation Expectations

• Fed’s Tolerance:
  • The Fed is comfortable with long-run inflation expectations where they are, viewing the slight increase post-COVID as a correction from previously too-low levels.
  • Current risk: Multiple shocks (COVID, tariffs, oil) may challenge this stability in consumer and business perceptions.
  • Quote [06:47], Michael Gapen:

    "As long as … long run inflation expectations are about where they are, I think the Fed's okay with that."

7. Labor Market Outlook

• General Equilibrium, Low Dynamism:
  • Immigration controls have dampened labor supply growth; hiring has slowed, but unemployment remains stable.
  • The labor market isn’t dynamic: average job growth is only 20-30,000 jobs monthly.
  • This stagnation, combined with potential demand side negatives from energy shocks, may eventually nudge the Fed toward easing.
  • Quote [07:54], Michael Gapen:

    “Yes, the labor market is in balance. But what concerns me and concerns us is it's not a very dynamic labor market… payroll growth close to zero doesn't feel good.”

8. U.S. Treasury Market Implications

• Performance & Hedge Value:
  • If the economy plays out as projected (delayed cuts, slow growth), U.S. Treasuries are likely to perform well and continue to serve as effective hedges against riskier assets.
  • Quote [09:45], Matthew Hornbach:

    “…U.S. treasuries, despite the recent sell off, have been behaving as good hedge securities for broader risky asset portfolios. So we certainly would expect the US treasury market to perform quite well in this scenario.”

Memorable Quotes & Moments

• On the Fed’s reaction process:

  • Michael Gapen [02:57]:

    "I can't even tell you whether or not we want to look through an increase in headline inflation until we get greater clarity that tariff pass through to core goods has ended."

• On labor market stagnation:

  • Michael Gapen [07:54]:

    "Payroll growth close to zero doesn't feel good. Rates of turnover movement in and out of the labor market have slowed down."

• On market dread post-FOMC:

  • Matthew Hornbach [05:19]:

    “…the market had been pricing about a 50% probability that the Fed would deliver its only rate cut in December.”

Notable Timestamps

• 00:36: Revision of Morgan Stanley’s rate cut forecast
• 01:21: Discussion of the near-singular focus on inflation at the press conference
• 02:57: The Fed’s cautious stance on supply-side shocks and rate cuts
• 04:33: The importance of long-term inflation expectations and the five-year miss
• 05:19: Market response and increased skepticism about easing
• 06:47: The Fed's view on inflation expectations post-pandemic
• 07:54: Analysis of labor market dynamics and lack of robustness
• 09:45: Expectations for U.S. Treasuries as a hedge and performance projection

Tone & Style

The dialogue is sharp, analytical, and data-driven, offering clear explanations for sophisticated financial listeners but remaining accessible to a broader audience interested in Fed policy and market strategy. The conversation reflects Morgan Stanley’s disciplined, empirical approach, with a focus on both macroeconomic signals and financial market implications.

Summary Prepared for Listeners and Readers Who May Have Missed the Episode