Morgan Stanley believes the Federal Reserve may cut rates even more aggressively than markets currently expect. While its baseline forecast calls for 25-basis-point cuts at each meeting through December 2026, the bank’s rates team argues that alternative economic scenarios tilt toward a more dovish path. Chair Jerome Powell’s Jackson Hole remarks signaled a stronger focus on labor market weakness than on sticky inflation, reinforcing expectations for easier policy.
The bank outlined three possible scenarios:
- a demand boost from fiscal stimulus (10% probability),
- a demand lift from higher Fed inflation tolerance (10%),
- and a mild recession from a trade shock or disruption (30%).
Combining these probabilities, Morgan Stanley estimates the fed funds rate could fall as low as 2.25% in 2025 before stabilising around 2.75%, with the probability-weighted path below current market pricing.
Morgan Stanley warns that markets are underestimating the chance of such outcomes, with bond markets assigning just a 20% probability versus their own more bearish assessment.
