Morgan Stanley Flags Fed Hike Risk if Unemployment Drops Below 4.0%
MS•MS•MS•MS•Morgan Stanley retains its forecast for no Fed rate changes through 2026, projecting fourth-quarter headline PCE inflation of 3.2% and core PCE of 3.0%. It warns that an unemployment rate below 4.0% or monthly core inflation above 0.3% could prompt the Fed to reconsider and raise rates.
Morgan Stanley expects the Federal Reserve to maintain current interest rates through year-end 2026, forecasting fourth-quarter headline PCE inflation of 3.2% and core PCE inflation at 3.0%. The firm cites falling oil prices and ending tariff pass-through as factors supporting its no-hike baseline.
Analyst Michael Gapen warns that if the unemployment rate falls below 4.0% or if monthly core inflation exceeds 0.3%, the Fed may consider further rate hikes. Additionally, any resurgence of Middle East conflict or sustained higher inflation readings would prompt Morgan Stanley to reassess its outlook.
