Morgan Stanley(US:MS) Sou Hu Cai Jing·2025-06-25 09:59Core Viewpoint - Morgan Stanley predicts that the Federal Reserve will begin a series of seven interest rate cuts starting in March 2026, ultimately lowering the federal funds rate to a range of 2.5% to 2.75%, which is significantly lower than the current policy rate and earlier than most institutions expect [1][3]. Economic Growth and Inflation Trends - The prediction is based on the assessment of a downward trend in economic growth and a decline in inflation. Over the past two years, the Fed has maintained interest rates above 5% to combat persistent inflation, but with a cooling labor market and weakening core price increases, the monetary environment has tightened [3]. - Morgan Stanley anticipates that by 2026, the U.S. economy will experience a cyclical slowdown, leading to a decrease in potential output growth and a structural slowdown in investment, necessitating a swift shift to accommodative monetary policy to prevent a hard landing [3]. Inflation Cycle and Monetary Policy - The end of the inflation cycle may arrive sooner than the market expects. Despite Fed Chair Powell's emphasis on a temporary rise in inflation during the summer, trends in rent, healthcare, and commodity prices indicate that most price structures are entering a downward trajectory [3]. - If energy prices remain stable and labor supply improves, inflation expectations may stabilize over the next two years, providing the Fed with ample room to implement easing measures [3]. Neutral Interest Rate and Policy Adjustment - Morgan Stanley's forecast of a final interest rate midpoint of 2.5%-2.75% suggests that the U.S. neutral interest rate has not been permanently elevated due to temporary factors such as the pandemic or geopolitical issues. If this assessment holds, the Fed will need to gradually "return to normal" in the coming years, aligning policy rates with inflation targets [3]. Uncertainties and Market Reactions - The proposed path is not without uncertainties, including high U.S. fiscal deficits, ongoing global supply chain restructuring, and potential geopolitical tensions. If inflation becomes sticky in services and wages, or if financial markets react excessively to premature easing, the Fed may have to delay its adjustment pace [4]. - Morgan Stanley's expectations represent a "baseline scenario" rather than a rigid policy blueprint, indicating a shift in market sentiment from "higher for longer" to "lower and faster," which will directly impact bond markets, the U.S. dollar, and growth assets, becoming a core variable in financial markets over the next two years [4].