Banking giant adjusts forecast, now sees rates moving lower than first expected
Morgan Stanley has changed its US interest rate forecast, predicting the Federal Reserve will cut rates at each of its three remaining meetings this year and once more in January.
The revised forecast arrives despite recent data showing inflation on the rise, with a weakening job market expected to spur more reductions than first anticipated. Previously, Morgan Stanley expected only two cuts in 2025, but now sees a faster pace of rate reductions as the Fed reacts to a slowing economy.
US consumer prices rose quickly at 0.4% in August, twice the increase seen in July, but underlying inflation wasn’t as strong. Morgan Stanley’s economists, led by Michael Gapen, said the softer inflation numbers could give the Fed more confidence to lower rates, even as some price pressures remain. They estimate the core personal consumption expenditure index will rise just 0.18% monthly, despite a larger jump in the overall consumer price index.
The investment banking giant expects four straight 25-basis-point rate cuts, starting at next week’s Fed meeting and continuing through January. They also predict two more cuts in April and July 2026, which would bring the federal funds rate down to between 2.75% and 3%. The economists noted that cutting rates by only 75 basis points would leave rates above the Fed’s estimate of a neutral level.
Fed chair Jerome Powell recently suggested a rate cut was possible at the September 16-17 meeting due to rising risks in the labor market, though he warned that inflation is still a concern. Recent data showed only 22,000 jobs were added, far below the 76,500 economists had expected. The unemployment rate edged up to 4.3% from 4.2%, while manufacturing jobs are declining. Gapen said the Fed can now focus more on the weakening job market, not just slow employment growth but also a drop in job vacancies.
Most market participants agree with Morgan Stanley’s new outlook. The CME FedWatch Tool shows traders see a 92.7% chance of a 25-basis-point cut next week, with only a small chance of a larger move. Standard Chartered is the only major firm expecting a bigger, 50-basis-point cut in September.
A series of Fed rate cuts could indirectly impact mortgage rates, which have been near their highest levels in decades. This may boost housing demand and refinancing, though lenders remain cautious due to economic uncertainty.
