Da Mo predicts that the Federal Reserve will accelerate interest rate cuts, with four consecutive cuts from September to January next year, accumulating 100 points!

Morgan Stanley Predicts Fed Will Accelerate Rate Cuts, Implementing "Four Consecutive Cuts" from September to January

Morgan Stanley's team of economists now forecasts that the Federal Reserve will implement rate cuts at four consecutive meetings from September this year to January next year. This view is based on persistently slowing inflation and a softening labor market, which they believe provides the central bank with room to accelerate its easing pace.

The market widely expects the Fed to deliver its first 25-basis-point cut at its meeting next week, with traders already betting on further cuts in October and December.

While market pricing suggests most investors believe the Fed will pause after December, with the first cut of 2026 potentially coming in April, Morgan Stanley outlines a different path. They project borrowing costs will fall consecutively in September, October, December, and January, ultimately bringing the upper bound of the target rate range to 3.5%.

Economists, including Michael Gapen, emphasized in their report that weaker inflation and a softening employment situation create "room to act more quickly" for the Fed to shift to a neutral policy stance. They noted that given the labor market weakness, the Fed will aim to achieve its neutral rate target "more decisively."

The team further predicts that after January, the Fed will likely pause to observe the customary first-quarter uptick in inflationary 'noise'. They wrote: "Once this noise subsides, we expect the Fed to cut rates further in April and July as the labor market continues to deteriorate."

It's noteworthy that although the predicted pace of cuts is significantly faster than their previous forecast (which envisioned quarterly 25-basis-point cuts starting from September this year through the end of 2026, bringing rates below 3%), Morgan Stanley has maintained its forecast for the ultimate level of the terminal rate.

Morgan Stanley's economists oppose the idea of a 50-basis-point cut this month. Their reasoning is that the current unemployment rate remains relatively low, and the federal funds rate, after being lowered by 100 basis points last year, is already closer to a neutral level, negating the need for more aggressive action.

Morgan Stanley has significantly adjusted its interest rate forecast for the Fed, believing that against a backdrop of softening inflation and employment data, the Fed will accelerate the pace of rate cuts. They anticipate it will swiftly guide the policy rate towards a neutral level through four consecutive cuts by early next year.

In a report released on Friday, economists led by Michael Gapen stated they now expect the Fed to cut rates by 25 basis points at each of the four consecutive meetings in September, October, December, and next January. This represents a noticeably faster pace compared to the bank's previous expectation of quarterly cuts.

This shift in prediction is primarily based on recently released inflation data (suggesting core PCE will be more moderate) and the unexpectedly weak August employment report. Morgan Stanley believes these factors provide policy space for the Fed to move more rapidly towards the neutral interest rate level—the theoretical level that neither stimulates nor restricts economic growth.

If this forecast materializes, the Fed's target range for the federal funds rate would reach approximately 3.375% by next January. This level aligns with the upper bound of the neutral rate estimated by most Fed officials according to the longer-term "dot plot." This move would suggest policymakers may prefer to front-load the easing cycle more decisively, significantly impacting market expectations.

​​Morgan Stanley: Fed to Implement "Four Consecutive Cuts" to Approach Neutral Rate​​

Morgan Stanley has adjusted its expected future rate cut rhythm from quarterly cuts to "consecutive" cuts. Specifically, they forecast the Fed will cut rates by 25 basis points each in September, October, December of this year, and January next year, totaling 100 basis points. This would bring the federal funds rate target range down to 3.375%, a level already close to the upper bound of the neutral rate indicated by the Fed's longer-term dot plot.

After completing these "four consecutive cuts," Morgan Stanley expects the Fed to pause operations and observe data to assess the distance from the neutral rate. The institution still believes the ultimate federal funds rate will reach a level of 2.875%.

Analysis points out that compared to the 2023 interest rate level, the current federal funds rate is already about 100 basis points closer to the neutral rate. Therefore, there is no immediate necessity for further large-scale cuts, dispelling some market expectations for a one-time 50 or 75 basis point cut.

The report suggests that while paths involving a 75-basis-point cut within the year followed by a pause, or a 50-basis-point cut this month, are technically feasible, considering the current low unemployment rate and the proximity to neutral, the pace of reduction will primarily consist of consistent 25-basis-point moves aimed at a "more decisive return to neutral."

Regarding the longer-term outlook, Morgan Stanley anticipates seasonal inflation fluctuations in the first quarter of 2026 might lead to a temporary policy wait-and-see period. After the inflation "noise" is digested, and as the labor market weakens, the Fed could still continue to cut rates in April and July 2026.