Morgan Stanley's mid-year macro outlook assumes the Federal Reserve will keep interest rates unchanged through the rest of 2026, with a measured easing phase commencing in 2027. That baseline rests on a combination of easing tariff-driven goods inflation and limited transmission of higher oil prices into core inflation measures.
Analyst Michael Gapen described the most recent Consumer Price Index release as largely compatible with the bank's expectations. Tariff-related price pressure slowed in April, with goods most exposed to tariffs showing smaller month-on-month increases than in previous months. Morgan Stanley estimates that tariffs have raised the overall price level by roughly 64 basis points to date, which the firm notes is near the approximately 70 basis points its models indicate as the full effect.
As the tariff impulse fades, the bank anticipates core goods inflation will return toward more normal rates. On the energy front, recent rises in oil prices pushed gasoline higher for a second month running, sustaining upward pressure on headline inflation. However, Morgan Stanley reports that the spillovers from higher energy into core inflation components have so far been limited. Among core categories, airfares are the only one showing a clear acceleration attributable to higher energy costs.
Looking at growth, Morgan Stanley expects US real GDP to expand by 2.3% in 2026 and 2.6% in 2027. The bank notes a modest drag on real consumption from elevated energy prices, which it expects will cap consumption growth at 1.8% in 2026 and exert disproportionate pressure on lower- and middle-income households. That consumption drag is expected to be partially offset by stronger business investment.
Specifically, Morgan Stanley projects nonresidential investment growth of 7% to 8% as AI-driven capital expenditure picks up, and it expects hyperscaler spending to exceed $1 trillion by 2027. The bank characterizes the labor market as maintaining a "curious balance," with monthly payroll gains of 50,000 to 60,000 sufficient to keep unemployment drifting toward 4.1% by 2027.
On inflation metrics central to Fed policy, Morgan Stanley forecasts core Personal Consumption Expenditures inflation easing to 2.8% to 2.9% in 2026 and slowing further to 2.3% in 2027. The bank anticipates the terminal federal funds rate will settle in a range of 3.0% to 3.25% under this scenario.