Morgan Stanley has revised its forecast for US monetary policy. Not long ago, Morgan Stanley analysts were confident in their previous hawkish outlook for US monetary policy. Now, they have softened their expectations. The bank now anticipates two rate cuts by the Federal Reserve until the end of 2025, followed by four more in 2026. The main reason is growing concerns over the weakness in the US labor market.
“Our prior monetary policy forecast has been revised in favor of a 50 basis point rate cut in 2025, and an additional 100 basis points of easing in 2026, bringing the target range to 2.75%–3.00%,” Morgan Stanley stated in a recent note.
Earlier, the bank’s analysts pointed out that the Federal Reserve was aware of risks to the US labor market, which may require less restrictive monetary policy. “US economic activity data shows signs of cooling, though the economy remains resilient,” they added.
The shift in forecast came after Fed Chairman Jerome Powell’s testimony in Jackson Hole, where he acknowledged the softness in recent US employment data.
The nonfarm payrolls for July revealed a downward revision of 258,000 jobs. Besides, three-month average job gains slowed to 35,000 for the overall figure and 52,000 in the private sector.
“Prior to the report, many FOMC participants believed the risks were tilted toward persistent inflation. However, Chair Powell made it clear that the July employment report has heightened concerns about weak labor demand,” Morgan Stanley analysts noted.
Jerome Powell also underscored that monetary policy is now in restrictive territory and that the evolving risk balance may require an adjustment to the Fed's stance. “Policy is currently in restrictive territory, so the changing risk profile may require a recalibration of the current stance,” Powell stated in Jackson Hole. Still, Morgan Stanley does not expect the Federal Reserve to start with a sharp 50-basis-point rate cut, unless upcoming labor market data show significant job losses.
Given the current landscape, Morgan Stanley now anticipates two 25-basis-point rate cuts in September and December 2025, followed by four additional cuts in 2026 in March, June, September, and December — also 25 basis points each. Previously, the bank had projected that the funds rate would be lowered to 2.50%–2.75% by the end of 2026, but that outlook has since been adjusted upward.
