
Morgan Stanley's bold prediction: The Federal Reserve will not cut interest rates this year, possibly delaying until March 2026

Morgan Stanley predicts that the Federal Reserve will not cut interest rates in 2023, possibly delaying until March 2026. It is expected that the Federal Reserve will maintain its assessment of the economy, emphasizing robust economic activity, a strong labor market, and slightly elevated inflation. Despite facing risks, economic growth remains solid, with the annualized GDP growth rate for the second quarter expected to be 2.2%. The inflation rate has risen slightly, and the unemployment rate remains low. Federal Reserve Chairman Jerome Powell mentioned the impact of tariffs on unemployment and inflation targets, and opposition is expected from Federal Reserve governors
According to the Zhitong Finance APP, before the Federal Reserve's July Federal Open Market Committee (FOMC) meeting, Morgan Stanley released its monetary policy forecast. The New York Fed collects market expectations regarding monetary policy and economic indicators before each FOMC meeting. In the latest report, Morgan Stanley briefly outlined its responses.
FOMC Policy Statement
Morgan Stanley expects the Federal Reserve to maintain its assessment of the economy—"economic activity is growing at a 'robust pace'," the labor market is "strong," and inflation is "slightly elevated." Morgan Stanley also expects the statement to once again emphasize the risks faced by the Fed's dual mandate.
Despite the impact on net export data, recent indicators show that U.S. economic activity continues to grow at a robust pace. The unemployment rate remains low, and the labor market conditions are still good. Inflation has slightly increased. The committee's goal is to achieve full employment and a 2% inflation rate (which is a long-term target). The uncertainty surrounding the economic outlook has decreased but remains at a high level. The committee is closely monitoring the risks faced by both aspects of its dual mandate.
Economic growth remains "on a solid pace." For the second quarter's Gross Domestic Product (GDP), Morgan Stanley expects an annualized quarterly rate of 2.2%. The Atlanta Fed's GDPNow model shows a GDP growth rate of 2.4% for the second quarter, while the New York Fed's Nowcast model results indicate 1.7%.
The labor market remains "in good shape." Employment growth has slowed, but the unemployment rate remains low—unchanged compared to 12 months ago.
Inflation remains "slightly elevated." The June CPI report included new price pressures on goods affected by tariffs. Early in the second quarter, there were signs that anti-inflationary pressures were easing.
The committee is closely monitoring the risks faced by both aspects of its dual mandate. Federal Reserve Chairman Jerome Powell has discussed the potential tension between the unemployment rate and inflation targets due to tariffs. A simple message might be: risks have increased, while current policies are in a favorable position.
Opposition. Morgan Stanley expects dissenting opinions from Fed governors Waller and Bowman. Last week, Waller delivered a speech aimed at "explaining why I believe the FOMC should lower our policy rate by 25 basis points at the next meeting." Fed governor Bowman also expressed a similarly strong inclination.
Press Conference
Morgan Stanley expects Powell to acknowledge the pressures from tariffs in the latest CPI report and to reiterate that "trade, immigration, fiscal, and regulatory policy adjustments are still evolving, and their impact on the economy remains uncertain." Despite considerable uncertainty, policies are prepared, and he will emphasize patience: a lot of waiting and watching is needed. More tariffs may emerge on August 1, and ongoing trade policy uncertainty raises concerns for the FOMC regarding the risks to both aspects of its dual mandate.
Morgan Stanley's Economic Data Forecast
From the fourth quarter to the next quarter, Morgan Stanley expects U.S. real GDP to grow by 0.8% in 2025 and by 1.1% in 2026; the seasonally adjusted annual rate for the fourth quarter of 2025 is expected to drop to 0.2% Tariffs have a tax effect on consumption and capital, which will slow down economic growth. Morgan Stanley predicts that consumption will slow to 0.6% this year and 0.7% next year, while non-residential fixed investment will be 3.7% this year, slowing to 1.5% by 2026.
The price increases of goods caused by tariffs will raise the overall and core PCE price index to 3.0% and 3.2% respectively by 2025. The core PCE inflation rate is expected to peak at an annualized rate of 4.1% by the end of the third quarter of 2025, before declining. Morgan Stanley believes that the impact of tariffs on inflation will be temporary; however, after several years of inflation above the target level, there is a risk that the rise in inflation expectations may exceed expectations.
The slowdown in economic growth means a reduction in the required labor force, while immigration control measures will suppress the growth of labor supply. Morgan Stanley expects job growth to slow from an increase of 130,000 per month in the first half of 2025 to about 50,000 per month in 2026. However, due to the slowdown in labor growth, the slack labor resulting from the slowdown in wage growth has not significantly increased. The unemployment rate is expected to rise slowly, from the current 4.1% to 4.4% in the fourth quarter of 2025 and 4.9% in the fourth quarter of 2026.
Due to the rise in inflation rates before the economic slowdown, and the inflation rate being further from the 2% target, along with a worse employment situation, the Federal Reserve will keep the target federal funds rate unchanged at 4.25%-4.50% until March 2026. Subsequently, after evident weakness and a slowdown in inflation, the Federal Reserve will lower the federal funds rate by 25 basis points at each meeting. Morgan Stanley expects they will delay the start of rate cuts, but the extent of the cuts will exceed market expectations or the previous dot plot's expectations. The reduction in immigration has lowered the potential growth rate and the neutral level of interest rates. Next year, the federal funds rate is expected to ultimately fall between 2.50%-2.75%