Overview
Morgan Stanley has updated its interest-rate outlook, projecting that the Federal Reserve will hold policy rates steady through the end of 2026 and enact two cuts in March and June of 2027. The latest view, outlined in a research note issued this week, shifts the timing of the initial easing from January to March 2027 compared with the bank's prior forecast.
Drivers of the forecast
The firm’s baseline for eventual rate cuts rests on an expectation that core inflation will decelerate as the impact of tariff pass-through diminishes. Recent datapoints cited by Morgan Stanley are consistent with that narrative - tariff pressures appear to be moderating, and influence spilling over from oil markets has been limited in scope.
Growth and consumption
Despite concerns about consumer behaviour, Morgan Stanley projects robust economic expansion for 2026. The bank forecasts gross domestic product rising by 2.3% on a fourth-quarter over fourth-quarter basis for 2026, even though consumer spending is expected to experience a temporary slowdown.
April retail sales data showed a decline when adjusted for inflation, but Morgan Stanley highlights upward revisions to February and March figures that introduce potential upside risk for consumption trends. The firm also flagged the upcoming quarterly services survey as a source of further information that could clarify the trajectory of consumer demand.
Implications
The revised timing for rate cuts reflects a cautious approach that waits for clearer evidence of sustained disinflation through factors such as easing tariff pass-through and contained energy-related spillovers. The bank’s scenario keeps policy restrictive through 2026 while leaving room for reductions in early 2027 should the projected slowdown in core inflation materialize.
Note on sources
This article summarizes the projections and analysis presented in Morgan Stanley's research note released this week and the datapoints the firm referenced in forming its baseline view.