In a significant shift that has captured the market's attention, investment banking giant Morgan Stanley has issued a bullish update to its economic forecast, predicting the Federal Reserve will implement not one, but two interest rate cuts in the latter half of 2025.
In a note to clients circulated earlier today, the firm's economists outlined a expectation for a 25 basis point (bps) cut at the Fed's September meeting, followed by another 25 bps cut in December. This revised outlook suggests a growing confidence that the Fed’s long-standing battle against inflation is nearing a successful conclusion, paving the way for a shift toward a more accommodative monetary policy.
The forecast is contingent on a continued cooling of inflationary pressures without a significant spike in unemployment. Morgan Stanley analysts pointed to recent economic data showing moderating consumer prices and a gradually softening labor market as key factors influencing their updated model. This stance places them at the more optimistic end of the spectrum on Wall Street, where consensus on the timing and number of cuts remains divided.
"This projection reflects our view that the Fed will have the confidence by September that inflation is sustainably trending toward its 2% target," the note stated. "We anticipate a methodical, two-step easing process to close out the year."
The immediate market reaction was positive, with futures ticking upward on the news. This forecast provides a clearer, though distant, timeline for businesses and investors who have been eagerly awaiting relief from the high interest rate environment that has defined the past two years. All eyes will now be on incoming economic data and the Federal Reserve's upcoming communications for signals that align with this newly bullish prediction.
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