The pace of rate cuts may accelerate! Morgan Stanley: The Fed may cut rates four times in a row, totaling 100 basis points!

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Morgan Stanley has significantly revised its forecast for the Federal Reserve's interest rate policy, predicting that, against the backdrop of weakening inflation and employment data, the Fed will accelerate its rate cuts, quickly moving the policy rate to a neutral level through four consecutive cuts by early next year.

Morgan Stanley economists including Michael Gapen noted in a report released Friday that 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 accelerated pace contrasts with the bank’s previous forecast of quarterly rate cuts.

This shift in forecast is mainly based on the inflation data released this week (which suggests a milder core PCE) and the unexpectedly weak August employment report. Morgan Stanley believes these factors provide the Fed with policy space to move more rapidly toward a neutral rate. The neutral rate is the theoretical level that neither stimulates nor restrains economic growth.

If this forecast comes true, the Fed’s federal funds rate target range will reach about 3.375% by January next year, a level matching the upper end of the neutral rate estimated by most Fed officials based on the long-term “dot plot.” This move means policymakers may prefer to front-load the easing cycle more decisively, which would significantly affect market expectations.

Morgan Stanley: The Fed Will Make “Four Consecutive Cuts” to Approach Neutral Rate

Morgan Stanley has adjusted its rate cut expectations from quarterly to "consecutive" cuts: specifically, the Fed will cut rates by 25 basis points each in September, October, December this year, and January next year—a total of 100 basis points, bringing the federal funds rate target range down to 3.375%. This rate is already close to the upper limit of the neutral rate shown in the Fed’s long-term “dot plot.”

After completing the “four consecutive cuts,” Morgan Stanley expects the Fed will pause and observe the data to assess its distance from the neutral rate. The institution still believes the final federal funds rate will reach 2.875%.

Analysis points out that compared to the interest rate levels in 2023, the current federal funds rate is already about 100 basis points above the neutral rate, so further sharp cuts are not directly necessary, which also dispels some market expectations for a one-time 50 or 75 basis point cut.

The report argues that, although a path of cutting 75 basis points this year and then pausing, or a one-time 50 basis point cut this month, is technically feasible, considering that the unemployment rate is still low and the rate is already close to neutral, the pace of cuts will mainly be coherent 25 basis point steps, aiming for a "more decisive return to neutral."

For a more distant outlook, Morgan Stanley expects that seasonal inflation volatility in the first quarter of 2026 may lead to a temporary policy pause, but once the "noise" of inflation is digested, as the labor market worsens, the Fed can continue cutting rates in April and July 2026.

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