Morgan Stanley Predicts 2026 Rate Cuts to 2.5% to 2.75%

Morgan Stanley has forecasted that the Federal Reserve will begin a series of interest rate cuts starting in March 2026. According to their predictions, these reductions will continue throughout the year, ultimately lowering the interest rate to a range of 2.5% to 2.75%. This projection comes amidst a backdrop of economic indicators that suggest a gradual cooling of inflationary pressures. The expected inflation rate for the current year has been revised down to 0.2%, a decrease from the previously anticipated 0.5%. For 2026, the inflation rate is now projected to be 0.6%, down from the earlier estimate of 0.8%.

The current interest rate stands between 4.25% and 4.5%. Analysts have noted that the Federal Reserve's bias remains tilted towards rate cuts, as signaled during their March meeting. This stance is likely influenced by the economic outlook, which includes a projected GDP growth rate of 1.4% for 2025. This figure represents a downward revision from the earlier estimate of 2.0% in March and a significant drop from the 2.8% growth rate observed in 2024.

Michael Gapen, U.S. Chief Economist at Morgan Stanley, emphasizes the influence of tariff-induced inflation as a decisive factor. “The recent tariff announcement boosts the risk of rising inflation, particularly over the next three to six months... Tariff-induced inflation will keep the Fed on the sidelines and as a result, Morgan Stanley Research is no longer anticipating a June rate cut. Instead, Morgan Stanley Research expects the Fed to wait until next March to begin cutting rates, ultimately ending 2026 in the range of 2.5% to 2.75%.”

The anticipated rate cuts will impact various asset classes, particularly encouraging a shift towards growth-oriented investments and potentially cryptocurrencies. Lower borrowing costs might increase liquidity and investor sentiment around riskier assets. Market reactions have been mixed, with traditional markets preparing for potential shifts in asset allocation strategies. No direct commentary from Federal Reserve officials was available, but the forecast sets a stage for future policy discussions.

Historical patterns suggest that prolonged low-interest environments support risk-on behaviors, favoring assets like Bitcoin and Ethereum. This trend has been observed in various markets. Market sentiment remains positive, with many investors focusing on Bitcoin-related ETFs to gain exposure in this burgeoning asset class.

The forecasted rate cuts also come at a time when the economic environment is characterized by uncertainty. The gradual decrease in interest rates over the next few years is expected to provide a more stable economic backdrop, which could be beneficial for long-term economic planning and investment strategies. However, the actual implementation of these rate cuts will depend on the Federal Reserve's assessment of economic data and its ongoing evaluation of inflationary trends.

In summary, Morgan Stanley's prediction of rate cuts starting in March 2026 reflects a cautious yet optimistic outlook on the economic trajectory. The anticipated reductions in interest rates are expected to support economic growth while managing inflationary pressures. As the economic landscape continues to evolve, the Federal Reserve's actions will be closely monitored for their impact on the broader economy.