Morgan Stanley Predicts 7 Rate Cuts by Fed in 2026

Morgan Stanley has forecasted seven interest rate cuts by the Federal Reserve in 2026, with the easing cycle expected to begin in March. The terminal rate is projected to fall to around 2.5–2.75% by the end of the year, signaling a shift towards a more accommodative monetary policy. This prediction is based on several factors, including ongoing tariff-related inflation pressures, a broader economic slowdown, and the need to restore neutral monetary conditions.

The investment bank's Head of Macro Strategy, Matt Hornbach, highlighted that tariff-induced inflation is expected to delay the onset of rate cuts. However, as economic growth slows down, the Fed is anticipated to pivot towards rate cuts. The first quarter GDP growth for 2025 was revised down to -0.5%, indicating a significant slowdown compared to the previous quarter's growth rate of 2.4%.

The potential impact of these rate cuts on financial markets is substantial. Aggressive rate cuts by the Fed could stimulate borrowing, injecting fresh capital into the markets. This influx of liquidity could potentially drive a significant rally in various asset classes, including stocks and cryptocurrencies. Historically, rate cuts have led to increased liquidity and asset price appreciation, as seen in the post-COVID period where rate cuts resulted in a parabolic rally in the crypto market.

If Morgan Stanley's projection materializes, 2026 could be a pivotal year for markets shifting toward a growth-friendly, low-rate environment. Stock markets may benefit from improved investor sentiment and stronger corporate earnings, especially in sectors sensitive to interest rates. Cryptocurrencies often perform well in low-rate environments, as reduced yields on traditional assets push investors toward higher-risk options like Bitcoin and altcoins. A weaker US dollar and lower bond yields could follow, creating additional tailwinds for global and risk assets.