Investing.com -- Morgan Stanley analysts expect the Federal Reserve to implement a series of four consecutive 25 basis point interest rate cuts, bringing the federal funds rate to 3.625% by May 2025.
The bank's forecast reflects slower economic growth, labor market cooling, and persistent inflationary pressures.
Morgan Stanley (NYSE:MS) highlighted that "lower immigration flows and more tariffs" are weighing on GDP growth and contributing to "stickier inflation."
While Morgan Stanley says inflation is projected to decelerate through early 2025, they add that it is expected to remain above the Fed's 2% target through 2026.
The firm forecasts core PCE inflation at 2.8% for 2024, 2.5% for 2025, and 2.4% for 2026.
The bank adds that economic growth is anticipated to slow significantly, with GDP projected to grow 2.4% in 2024, 1.9% in 2025, and 1.3% in 2026 on a year-over-year basis.
"The consumer slows" as labor income growth decelerates and tariffs dampen activity, Morgan Stanley said. They believe the labor market will also feel the effects, with unemployment rates rising from 4.1% in 2025 to 4.5% by the end of 2026.
Morgan Stanley anticipates the Fed will pause rate cuts in the second half of 2026 as economic growth falls below potential. Quantitative tightening (QT) is also expected to conclude by early 2025.
The bank outlined three alternate scenarios, including a "hard landing," where the Fed overtightens, and GDP contracts in 2025; a "reacceleration," where rate cuts fuel economic growth; and a "China reflation," in which U.S. inflation slightly increases due to more expensive imports.
Amid these uncertainties, Morgan Stanley emphasized the Fed's caution: "The Fed cuts 25bp in the next four FOMC meetings, taking the fed funds rate to 3.625% by May 25. Signs of stickier inflation and overall policy uncertainty lead the Fed to pause until 2H26 when rapid cuts bring rates below neutral as growth slows below potential. At the same time, the Fed finishes QT in 1Q25."