Morgan Stanley's Revised Interest Rate Outlook

Investing.com — Morgan Stanley (NYSE:MS) predicts the Federal Reserve will implement smaller interest rate cuts in the upcoming year, delaying future reductions due to inflation concerns.

Analysts at Morgan Stanley have adjusted their expectations and no longer foresee a 25 basis point cut in January 2025. Instead, they anticipate cuts of 25 basis points in March and June.

> “The Fed's hawkish turn appears to reflect potential changes to trade, immigration, and fiscal policy by certain members, resulting in a firmer inflation path and, consequently, a firmer policy rate path,” stated Morgan Stanley analysts in a note.

The analysts predict at least three rate cuts in 2026 but have raised the expected terminal rate to 2.6%, up from previous forecasts of 2.4%.

This revised outlook aligns with similar moves from other financial firms. For instance, Goldman Sachs indicated earlier this week that it no longer anticipates a cut in January, citing persistent inflation and a resilient labor market.

Market traders have increased bets on the Fed maintaining current rates in January, with a 91.1% chance of rates being held steady, up from 75.4% the previous week, according to CME Fedwatch.

Recently, the Fed enacted a 25 basis point cut as expected but adopted a more hawkish stance than markets anticipated. Chair Jerome Powell emphasized a slower pace of cuts moving forward.

The Fed has adjusted its rate cut outlook for 2025, expecting to lower rates only twice in the next year.

Powell noted strong economic growth anticipated in the latter half of 2024 and indicated that downward risks in the labor market have diminished, necessitating a slower approach to monetary easing.

Additionally, the incoming Donald Trump administration could introduce more inflationary pressures due to promises of expansionary and protectionist policies from the President-elect.