Morgan Stanley Predicts Seven Fed Rate Cuts Starting March 2026, Lowering Terminal Rate to 2.5%-2.75%, Boosting S&P 500

Morgan Stanley forecasts that the US Federal Reserve will implement seven interest rate cuts in 2026, beginning in March. These cuts are expected to reduce the terminal federal funds rate to between 2.5% and 2.75%. This projection diverges from the Fed's current guidance and anticipates a shift in monetary policy as Federal Reserve Chair Jerome Powell's term nears its end, with Powell likely initiating two cuts and his successor implementing the remaining five. Morgan Stanley's strategist Wilson has indicated that these rate reductions will support a continued rally in the S&P 500 over the next six to twelve months, driven by improving earnings and market expectations. The market currently prices in three rate cuts by the end of 2025 and two additional cuts in 2026, which would bring the federal funds rate down to approximately 3%. Overall, Morgan Stanley maintains a bullish outlook on US stocks, anticipating that the expected monetary easing will provide a positive catalyst for equity markets.