Morgan Stanley has revised its economic growth outlook for the United States, citing the impact of tariffs and labor market constraints as key factors driving inflation. The investment bank now projects that the U.S. economy will grow at a slower pace than previously expected in the coming years.
Economists at Morgan Stanley, led by Michael T. Gapen, highlighted that tariffs are expected to take a more immediate toll on economic activity, shifting their impact from 2026 to 2025. As a result, the firm has lowered its fourth-quarter 2025 year-over-year growth forecast from 1.9% to 1.5% and adjusted its 2026 forecast from 1.3% to 1.2%.
Tariffs and Inflationary Pressures
President Trump’s tariff policies are anticipated to increase inflationary pressures, putting additional strain on consumers and businesses. Higher tariffs often lead to increased costs for imported goods, which can contribute to broader price hikes across various sectors.
This inflationary trend could also complicate the Federal Reserve’s efforts to stabilize the economy. Morgan Stanley’s note emphasized that the central bank will face challenges in balancing economic growth and inflation control as it navigates these policy shifts.
Federal Reserve’s Monetary Policy Approach
Despite the downward revision in economic growth expectations, Morgan Stanley has maintained its forecast that the Federal Reserve will implement only one interest rate cut of 25 basis points in 2025, likely in June. The firm remains skeptical of market predictions that anticipate multiple rate cuts within the year.
Gapen stated, “We think markets will ultimately get these cuts, but much later than they expect,” indicating that the Fed will likely remain cautious in adjusting rates in response to persistent inflation.
Goldman Sachs Adjusts Economic Outlook
In a similar move, Goldman Sachs has also revised its economic projections, lowering its 2025 fourth-quarter year-over-year GDP growth forecast from 2.2% to 1.7%. Additionally, Goldman has raised its estimated probability of a U.S. recession in the next 12 months from 15% to 20%.
These adjustments reflect growing concerns about the long-term effects of trade policies, labor market dynamics, and inflationary risks. As economic uncertainties persist, both Wall Street and policymakers will closely monitor developments to determine the best course of action for sustaining economic stability.