Morgan Stanley's Rate Cut Shift Reflects Fed Caution on Inflation

Morgan Stanley has revised its expectations for Federal Reserve rate cuts, abandoning a previously anticipated reduction in December 2025 and instead projecting three cuts in January, April, and June of next year. This shift reflects the firm's updated assessment of economic conditions and monetary policy trajectories, as outlined in a recent bond strategy commentary according to Morgan Stanley's analysis. The firm now anticipates a total of 100 basis points of easing in 2025, followed by a single 25-basis-point cut in 2026, signaling a more measured approach to accommodative policy.

The decision to pivot from a December cut aligns with broader market dynamics, including persistent inflationary pressures and a labor market that remains resilient despite recent data revisions. Morgan Stanley's analysis highlights the Federal Reserve's cautious stance, as evidenced by the September Summary of Economic Projections, which reduced the median year-end 2025 Fed Funds rate to 3.625% from 3.875% in June. This adjustment implies a 50-basis-point easing path for the remainder of 2025, with further reductions contingent on evolving economic indicators.

The firm's revised rate outlook coincides with a series of strategic moves in equity markets. Morgan Stanley downgraded Corebridge Financial to Equalweight, citing concerns over spread compression and vulnerability to interest rate fluctuations. Similarly, Dell Technologies faced a downgrade to Underweight, driven by surging memory costs and margin pressures. These actions underscore the firm's focus on sector-specific risks amid an uncertain rate environment.

Conversely, Morgan Stanley upgraded Nasdaq to Overweight, emphasizing cyclical tailwinds and a favorable long-term growth trajectory. The firm also raised its price target for Apollo Global Management to $180, reflecting optimism about fee-related earnings growth and capital markets recovery. These divergent calls highlight Morgan Stanley's nuanced approach to balancing near-term macroeconomic challenges with structural opportunities.

Morgan Stanley's internal projections also factor in Fed rate expectations. MidWestOne Financial's recent earnings call noted an anticipation of two 25-basis-point cuts in the second half of 2025, primarily in Q4, aligning with Morgan Stanley's revised timeline. This consensus among market participants suggests a growing alignment on the Federal Reserve's path toward normalization, albeit at a slower pace than earlier projected.

Morgan Stanley's strategic adjustments reflect a broader recalibration of risk across asset classes. While the firm remains cautious on rate-sensitive sectors, its upgrades in technology and financials signal confidence in structural growth drivers. The evolving Fed policy outlook, meanwhile, continues to shape investment strategies as markets navigate the delicate balance between inflation control and economic stability.