Morgan Stanley Strategists Forecast Series of 25-Basis Point Interest Rate Cuts Through Mid-2025
In a note following the Federal Reserve's half-point rate reduction announcement, Morgan Stanley strategists predict a series of 25-basis point interest rate cuts extending into mid-2025. This aligns with the Fed's data dependency stance, with Chair Jerome Powell emphasizing the importance of flexibility in policy.
The forecast includes two more 25-basis point reductions before year-end, bringing the rate down to 4.4%. The team expects the Fed to continue cutting rates into 2025, with an additional four 25-basis point cuts projected in the first half of next year. This dovish projection reflects the Fed's confidence in inflation moderating toward its 2% target.
Powell highlighted the economy's health and solid labor market during the press conference but emphasized the need to "recalibrate policy." Recent easing of inflation risks and rising concerns over the labor market led to the significant initial 50-basis point cut, the largest since the 2008 financial crisis.
The Fed's "dot plot" indicated an additional 50 basis points of reductions by year-end, in line with market expectations. Individual projections from Fed officials suggest a total decline of around 2 percentage points from Wednesday's decision by the end of 2025.
Analysis:
Morgan Stanley's forecast of ongoing interest rate cuts signals a cautious approach by the Federal Reserve to support economic growth and manage inflation. Investors may see lower borrowing costs, potentially impacting savings and investment returns. Consumers could benefit from reduced interest rates on loans, while businesses may find it easier to access credit for expansion. Overall, the Fed's decision to cut rates reflects its commitment to maintaining economic stability and responding proactively to changing economic conditions.