Morgan Stanley Predicts Fed Funds Rate at 3%-3.25%, Core PCE 2.8%-2.9% in 2026
Morgan Stanley projects the Fed will hold rates at a 3.0%-3.25% terminal range through 2026, with core PCE inflation cooling to 2.8%-2.9% next year and 2.3% in 2027. The bank sees tariff passthrough contributing 64 basis points to prices so far, while AI-driven capex lifts nonresidential investment growth to 7%-8%.
1. Fed Rate and Inflation Projections
Morgan Stanley anticipates the Federal Reserve will maintain the federal funds rate at 3.0%–3.25% through 2026, initiating gradual easing only in 2027, and forecasts core PCE inflation will ease to between 2.8% and 2.9% in 2026 before falling to 2.3% in 2027.
2. Tariff Passthrough and Goods Inflation
Tariff passthrough has decelerated, contributing roughly 64 basis points to overall price levels; goods subject to those levies rose at a slower pace in April, and core goods inflation is projected to normalize as this impulse dissipates.
3. Energy Prices and Core Components
Higher oil prices have pushed gasoline costs up for a second consecutive month, but spillovers into core categories remain contained, with airfares the only core component showing clear acceleration in response to energy-driven pressures.
4. Growth, Investment, and Labor Market Outlook
Real GDP is projected to expand 2.3% in 2026 and 2.6% in 2027, supported by AI-driven capital expenditures boosting nonresidential investment by 7%–8% and hyperscaler spending surpassing $1 trillion by 2027, while payroll gains of 50,000–60,000 monthly drive unemployment toward 4.1%.