04:16 PM EDT, 04/08/2025 (MT Newswires) -- The Federal Reserve is expected to keep its monetary policy on hold throughout this year and resume cutting interest rates in March 2026 as the US central bank monitors the impact of tariffs on inflation and economic activity, Morgan Stanley said.

On Friday, Fed Chair Jerome Powell said the Trump administration's tariffs will likely drive inflation higher and slow down US economic growth.

"We are well positioned to wait for greater clarity before considering any adjustments to our policy stance," Powell said at the time. "It is too soon to say what will be the appropriate path for monetary policy."

Powell's remarks suggest that tariffs "caused a shift in the Fed's thinking," Morgan Stanley Chief US Economist Michael Gapen said in a note emailed on Tuesday. "While the Fed will be inclined to look through inflation and reduce the degree of policy restriction to support growth in economic activity, we think it will take time for the Fed to conclude tariff-induced inflation is transitory."

The Fed is not expected to deliver any rate cuts in 2025, with an easing cycle likely to begin in March 2026, Gapen said. However, if the economy enters a recession, it could mean "earlier and larger up-front cuts," he said.

Last week, the Trump administration announced broad-scale tariffs on US imports, including from China, which responded with its own retaliatory duties. China's commerce ministry reportedly said Tuesday that Beijing will "fight to the end" if the US imposes the additional 50% tariffs threatened by US President Donald Trump on Monday.

The Trump administration is moving forward with the additional tariffs on China that will bring the total rate of levies on the Asian country to 104%, a White House official told CNBC. The new rate goes into effect at 12:01 am ET Wednesday.

Morgan Stanley lowered its US economic growth forecasts to 0.8% and 0.7% for 2025 and 2026, respectively, from 1.5% and 1.2%. The investment bank lifted its 2025 estimates for headline and core personal consumption expenditures inflation by about one percentage point each to 3.4% and 3.9%, respectively.

The investment bank forecasts the terminal rate to reach 2.50% to 2.75% by late 2026. Last month, the Federal Open Market Committee left its policy rate steady in the 4.25% to 4.50% range for a second straight meeting.