Investors Betting on Fed Pivotal Shift: Rate Cuts on Horizon by Mid-2026

The U.S. Federal Reserve has been closely monitored by financial markets and analysts for signs of when it might begin its long-anticipated series of rate cuts. Morgan Stanley, one of the leading global investment banks, has recently issued a forecast indicating that the central bank could implement three rate cuts by July 2026. This projection reflects a cautious assessment of the evolving macroeconomic environment and shifting inflation dynamics.

Morgan Stanley’s outlook is based on a comprehensive analysis of current inflation trends, labor market conditions, and the overall trajectory of U.S. economic growth. According to the firm, while inflation has shown signs of moderation, it remains above the Federal Reserve’s 2% target. However, the pace of economic growth has slowed in recent quarters, which is creating a more favorable backdrop for a policy easing cycle. The bank emphasizes that the Fed will likely prioritize price stability but may not hesitate to cut rates if signs of a slowdown become more pronounced.

The timing of these potential rate cuts is critical. Morgan Stanley anticipates the first reduction could occur as early as the second half of 2025, with subsequent cuts following in the first half of 2026. The projected cuts are expected to be modest, with each reduction likely limited to 25 basis points. Such a gradual approach aligns with the Fed’s historical tendency to avoid abrupt policy shifts, even in the face of economic headwinds.

The forecast from Morgan Stanley stands in contrast to some more hawkish predictions from other institutions, which suggest the Fed may hold rates at current levels for a longer period. However, the firm’s analysis highlights the potential for a more balanced policy response, especially if incoming data continues to show a softening in inflation and signs of economic weakness. The central bank has previously indicated its willingness to adjust policy in response to new information, making flexibility a core component of its decision-making framework.

Investors and market participants have already begun factoring in the possibility of rate cuts, leading to a notable shift in interest rate expectations and bond yields. The U.S. Treasury market, in particular, has priced in a roughly 60% probability of at least one rate cut by mid-2026, according to the latest data from the CME FedWatch tool. This suggests that while the market is not yet fully aligned with Morgan Stanley’s three-cut forecast, there is growing consensus that a reduction in rates is becoming increasingly likely.