Morgan Stanley analysts expect the Federal Reserve to implement four consecutive 25 basis point interest rate cuts, bringing the federal funds rate to 3.625% by May 2025.
The bank's forecast reflects slowing economic growth, a cooling labor market, and continued inflationary pressures.
Morgan Stanley pointed out that "lower immigration flows and more tariffs" are putting pressure on GDP growth and contributing to "more unmanageable inflation."
Although Morgan Stanley predicts inflation will moderate by early 2025, they added that it is expected to remain above the Federal Reserve's 2% target through 2026.
The firm expects core PCE inflation at 2.8% for 2024, 2.5% for 2025, and 2.4% for 2026.
The bank also expects economic growth to slow significantly, with GDP growth forecast at 2.4% in 2024, 1.9% in 2025, and 1.3% in 2026 year-on-year.
Morgan Stanley expects the Federal Reserve to stop cutting interest rates in the second half of 2026 as economic growth falls below potential. Quantitative tightening (QT) is also expected to be completed by early 2025.
