Rising oil prices impact market's expectations of interest rate cuts, but Morgan Stanley still predicts that the Federal Reserve will cut rates in June.

Morgan Stanley maintains its forecast for the Federal Reserve to restart interest rate cuts in June and to cut rates again in September, despite a surge in oil prices prompting traders to reduce their bets on the magnitude of rate cuts this year. Michael Gapen, chief US economist at Morgan Stanley, said during a roundtable discussion with Bloomberg News in New York on Monday, "We still see June and September, with of course risks of delay." This forecast contrasts with market pricing. The sharp increase in oil prices following the outbreak of the Iran war could lead to a resurgence of inflation, potentially limiting the Fed's room to ease monetary policy, prompting the market to quickly lower its expectations for rate cuts. Futures currently tied to the Fed's policy rate predict a 25-basis-point rate cut in December. The market sees a 60% chance of a 25-basis-point rate cut in September. Economists at TD Securities and Barclays also last week pushed back their expectations for the Fed's next rate cut from June to September.