Morgan Stanley Revises Fed Outlook, Now Expects Four Rate Cuts in 2026
Morgan Stanley has adjusted its forecast for U.S. monetary policy, predicting that the Federal Reserve will cut interest rates twice in 2025 and four more times in 2026. The revision reflects growing concerns about weakness in the U.S. labor market.
In a note released Friday, Morgan Stanley analysts said: “We now expect 50 basis points in rate cuts this year and another 100 basis points in 2026, targeting a terminal range of 2.75%–3.0%.”
The analysts explained that the Fed views downside risks to employment as justification for easing monetary policy, even as broader economic activity remains resilient.
The shift comes after Fed Chair Jerome Powell’s remarks at Jackson Hole, where he acknowledged softness in recent employment data. July’s jobs report included downward revisions of 258,000 positions in prior months, while the three-month average for payroll growth slowed to just 35,000 overall and 52,000 for private-sector jobs.
“Before this report, most FOMC members saw inflation as the bigger risk,” Morgan Stanley noted. “But Powell made clear that weak labor demand is now a growing concern.”
Under the new forecast, the bank expects 25bp rate cuts in September and December 2025, followed by four additional quarter-point cuts in March, June, September, and December 2026. This marks a shift from its previous outlook, which had cuts starting only in 2026 with a lower terminal rate of 2.50%–2.75%.
Powell stressed that policy remains restrictive but hinted at flexibility: “The baseline outlook and shifting balance of risks may warrant adjusting our stance,” he said. Still, Morgan Stanley added that the Fed is unlikely to deliver a larger 50bp cut unless upcoming jobs data show outright job losses.
