Morgan Stanley again adjusts its Fed forecast, now sees 4 cuts in 2026

Morgan Stanley has revised its U.S. monetary policy outlook, now forecasting two Federal Reserve rate cuts totaling 50 basis points in 2025 and four additional cuts totaling 100 basis points in 2026, targeting a terminal range of 2.75–3.0%. This accelerated timeline, compared to their prior 2026 start prediction, is driven by heightened concerns over labor market weakness, a sentiment echoed by Fed Chair Jerome Powell at Jackson Hole following softer employment data that shifted the Fed's focus from inflation persistence to labor demand.

Analysis

Morgan Stanley has materially revised its U.S. monetary policy outlook, now forecasting an earlier start to Federal Reserve rate cuts in 2025. The firm anticipates two 25 basis point cuts in September and December 2025, followed by an additional 100 basis points of cuts in 2026, targeting a terminal federal funds rate range of 2.75–3.0%. This acceleration is driven by mounting concerns over labor market weakness, a sentiment that has gained traction within the FOMC, as articulated by Fed Chair Jerome Powell. The pivot in focus from inflation persistence towards downside risks in employment follows a soft July jobs report, which featured a significant 258,000 downward revision to prior months and a slowing three-month average payroll change to just 35,000. While the Fed's stance is now perceived as more dovish, Morgan Stanley notes that a more aggressive 50 basis point initial cut is unlikely unless upcoming employment data shows outright job losses, indicating that the path of policy easing remains highly data-dependent.

Key Decisions for Investors

• Consider increasing exposure to rate-sensitive assets, such as growth equities and long-duration bonds, as an accelerated timeline for Fed rate cuts could create a favorable environment for these sectors.
• Monitor upcoming labor market data with heightened scrutiny, as the analysis indicates that the pace and magnitude of monetary easing are directly contingent on the degree of further employment weakness.
• Balance the potential for a dovish policy pivot against the underlying economic risk, as the catalyst for rate cuts is a deteriorating labor market, which could negatively impact corporate earnings and broader economic growth.