Morgan Stanley expects the Federal Reserve to keep interest rates at current levels until the end of 2026, before beginning a gradual easing cycle in 2027.
The bank's mid-year forecast is based on fading tariff pass-through and a limited impact of rising oil prices on core inflation.
Analyst Michael Gapen noted that consumer price index data are generally consistent with these assumptions.
Tariff pressure slowed in April, with the most tariff-exposed goods rising more slowly than in previous months. Morgan Stanley estimates that tariffs increased overall prices by approximately 64 basis points—close to the 70 basis points projected by the bank's models.
The bank expects inflation in the core goods segment to normalize as the tariff impulse fades. In terms of energy, rising oil prices pushed up gasoline prices for the second month in a row, keeping overall inflation elevated. However, Morgan Stanley notes that the spillover into underlying components remains limited: the only category showing a clear acceleration is air travel.
"We expect U.S. economic growth to remain near trend, with real GDP expanding 2.3% in 2026 and 2.6% in 2027. The moderate headwind from high energy prices limits real consumption growth to 1.8% in 2026, with low- and middle-income households feeling a disproportionate burden," Gapen wrote.
Business investment is expected to provide a significant offsetting effect: capital spending driven by artificial intelligence will accelerate nonresidential real estate investment growth to 7-8%, with spending by major tech companies expected to exceed $1 trillion by 2027.
Morgan Stanley described the labor market as maintaining a "curious balance": monthly job growth of 50,000-60,000 is sufficient for unemployment to gradually decline to 4.1% by 2027.
The bank forecasts the core personal consumption expenditures (PCE) index to decline to 2.8-2.9% in 2026 and to 2.3% in 2027, with the final federal funds rate set at 3.0-3.25%.