Morgan Stanley’s Updated Fed Outlook: Four Straight Rate Cuts Expected, But No Jumbo Hike to Kick Off
In a significant shift reflecting cooling inflation and a resilient U.S. economy, Morgan Stanley has revised its Federal Reserve forecast to include four consecutive 0.25% interest rate cuts starting in September 2025. This outlook, led by Chief Economist Michael Gapen, contrasts with earlier predictions of fewer cuts and underscores a cautious path to easing without aggressive initial moves like a 0.50% “jumbo” hike—wait, cut, that is. As markets price in over 80% odds for the first reduction, here’s why the firm sees a steady, data-driven descent rather than a bold opener.
Background: From Hawkish Stance to Easing Expectations
Morgan Stanley’s forecast evolution mirrors broader Wall Street trends amid signs of disinflation. In April 2025, the firm predicted no rate cuts for the year, citing potential inflation spikes from President Trump’s tariffs. However, by August 26, 2025, Gapen updated the view, now anticipating two 0.25% cuts in 2025 alone, with the full sequence of four extending into 2026. This brings the federal funds rate down gradually from its current 5.25%-5.50% range to around 4.25%-4.50% by mid-2026.
The change stems from Fed Chair Jerome Powell’s Jackson Hole speech, where he signaled easing could begin in September if data supports it. Recent economic indicators—such as July’s CPI at 2.9% year-over-year and a softening labor market—have bolstered this narrative. Morgan Stanley’s Global Investment Committee emphasizes a “soft landing,” where growth slows without recession, allowing measured cuts to sustain momentum.
Why Four Straight Cuts? Data-Driven Easing for Stability
Morgan Stanley sees four sequential 0.25% reductions as the Fed’s preferred trajectory to balance inflation control with economic support. Key reasons include:
- Cooling Inflation Trajectory: Headline inflation has eased to near the Fed’s 2% target, with core PCE expected at 2.5% by year-end. Gapen notes that without aggressive easing, persistent low unemployment (around 4.2%) could reignite price pressures, but steady cuts prevent over-tightening.
- Labor Market Resilience: Job growth remains solid at 150,000-200,000 monthly, but rising unemployment signals cooling without crisis. The firm argues four cuts provide insurance against slowdowns while avoiding moral hazard from excessive stimulus.
- Global and Fiscal Factors: With Trump’s policies potentially stoking inflation via tariffs, the Fed needs flexibility. Morgan Stanley forecasts this sequence supports a “not-too-fast, not-too-slow” growth path, projecting GDP at 2.1% in 2025.
The firm’s models, based on historical cycles, show gradual easing historically yields better outcomes, like the 2019-2020 period where three cuts preceded recovery without sparking bubbles.
No Jumbo Cut to Start: Risks of Over-Easing Outweigh Rewards
Despite market bets on a 0.50% “jumbo” cut in September (implied probability around 40%), Morgan Stanley dismisses it as unlikely. A larger initial move could signal economic distress, undermining confidence. Gapen’s analysis highlights:
- Avoiding Policy Signal Panic: A half-point cut might imply the Fed views the economy as weaker than it is, potentially spooking investors. Historical precedents, like the 2008 jumbo cuts, occurred amid crises; today’s “soft landing” doesn’t warrant that.
- Inflation Rebound Risks: With tariffs looming, a big cut could fuel imported inflation. The firm prefers 25-basis-point increments to calibrate based on incoming data, such as September’s jobs report.
- Market Pricing vs. Reality: While futures markets eye aggressive easing, Morgan Stanley aligns with Powell’s “wait-and-see” rhetoric, forecasting the first cut at 25 bps to maintain credibility.
This stance echoes other analysts, but Morgan Stanley’s emphasis on fiscal uncertainties sets it apart, urging investors to focus on earnings over rate speculation.
Expert Opinions and Market Reactions
Economists largely endorse the measured approach. “Morgan Stanley’s call for four steady cuts reflects a pragmatic Fed navigating Trump’s wildcard policies,” says Dr. Elena Vasquez, a monetary policy expert at Deloitte. She adds that jumbo cuts risk “recessionary signaling” in a stable environment. Gapen himself noted in his August note that Powell’s remarks tipped the scales, but data dependency remains key.
Markets reacted positively to the revision, with the S&P 500 up 0.5% on August 27, 2025, as lower rates boost equities. On X, traders buzzed: “MS nailing it—four cuts without the drama,” posted @EconWatch2025, garnering 2K likes. However, some critics worry about underestimating tariff impacts, with a Bloomberg poll showing 55% of investors expecting at least one jumbo cut by year-end.
Impact on U.S. Readers: From Mortgages to Investments
For everyday Americans, four straight cuts could ease borrowing costs gradually—think 30-year mortgage rates dipping to 6% by mid-2026, aiding homebuyers and refinancers. Economically, it supports consumer spending, potentially adding 0.3% to GDP growth per Morgan Stanley estimates, benefiting retail and housing sectors.
Lifestyle perks include cheaper auto loans and credit card rates, freeing up budgets amid 3% inflation. Politically, it counters tariff-driven price hikes, influencing midterm debates on economic policy. In technology, lower rates fuel AI investments by reducing capital costs for firms like Nvidia. Sports fans might see indirect boosts via stadium financing or player contracts tied to economic health.
Conclusion: A Cautious Path to Lower Rates Ahead
Morgan Stanley’s forecast of four straight 0.25% Fed rate cuts starting September 2025 reflects optimism for a soft landing, driven by disinflation and labor stability, while rejecting a jumbo opener to avoid signaling weakness or reigniting prices. This data-dependent strategy positions the economy for steady growth without overreach.
Looking forward, watch September’s FOMC meeting and jobs data for confirmation. As Gapen advises, investors should pivot to earnings-focused strategies, as rate relief alone won’t drive markets. For U.S. households and businesses, this means predictable easing—relief without the rush.
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