Morgan Stanley expects Fed to cut interest rates by 25 bps each in March, June, September and December in 2026, taking terminal target range to 2.75-3.0%

Morgan Stanley expects Fed to cut interest rates by 25 bps each in March, June, September and December in 2026, taking terminal target range to 2.75-3.0%

Title: Morgan Stanley Predicts Four Rate Cuts in 2026

In a recent analysis, Morgan Stanley has forecasted that the Federal Reserve will implement a series of interest rate cuts in 2026. The firm anticipates that the Fed will reduce interest rates by 25 basis points (bps) each in March, June, September, and December, bringing the terminal target range to 2.75-3.0% [1].

This prediction comes amidst ongoing market speculation about the Fed's next moves following Jerome Powell's remarks at the Jackson Hole Economic Policy Symposium. Powell indicated that conditions might warrant adjusting the policy stance, which is widely interpreted as a signal for potential rate cuts [2].

The market's implied probability for another rate cut in October is currently at 42%, with the expectation for three total moves this year at 33% [1]. However, there is less certainty about the pace and magnitude of future rate cuts, with some market experts expressing caution about the potential impact of tariff-induced inflation and an economy that is holding up despite signs of a slowing labor market [1].

Morgan Stanley's chief investment officer, Lisa Shalett, cited ongoing concerns about inflation and the Fed's commitment to independence amidst political pressure to lower rates. She also noted that the market's expectations for rate cuts may not fully align with the Fed's data-driven approach, which has been a key shift in Powell's tenure [1].

Ed Yardeni, the head of Yardeni Research, expressed skepticism about the wisdom of another round of rate cuts, pointing to the Fed's past mistakes in 2024 when a 100 bps cut led to an inverse move in Treasury yields [1]. Despite these concerns, Yardeni maintained a bullish view on stocks, predicting that the S&P 500 could add another 2% by the end of 2025 and another 14% in 2026 [1].

As the Fed prepares for its September meeting, investors and financial professionals will closely watch the economic data and Powell's remarks for further clues about the central bank's policy direction. The Fed's commitment to a data-driven framework, despite political pressures, will likely shape its decisions in the coming months [2].

References:
[1] https://www.cnbc.com/2025/08/25/markets-are-sure-the-fed-will-cut-in-september-but-the-path-from-there-is-much-murkier.html
[2] https://www.forbes.com/sites/garthfriesen/2025/08/22/jackson-hole-puts-spotlight-on-powell-and-fed-interest-rate-cuts/