Mapping Global Central Bank Paths

Our Global Chief Economist Seth Carpenter joins our chief regional economists to discuss the outlook for interest rates in the U.S., Japan and Europe.

Read more insights from Morgan Stanley.

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Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And today we're kicking off our quarterly economic roundtable for the year. We're going to try to think about everything that matters in economics around the world. And today we're going to focus a little bit more on central banking. And when we get to tomorrow,  we'll focus on the nuts and bolts of the real side of the economy. 

I'm joined by our chief regional economists. 

Michael Gapen: Hi, Seth. I'm Mike Gapen, Chief U.S. Economist at Morgan Stanley. 

Chetan Ahya: I'm Chetan Ahya, Chief Asia economist. 

Jens Eisenschmidt: And I'm Jens Eisenschmidt, Chief Europe economist. 

Seth Carpenter: It's Thursday, January 22nd at 10 am in New York. 

Jens Eisenschmidt: And 4 pm in Frankfurt. 

Chetan Ahya: And 9 pm in Hong Kong. 

Seth Carpenter:  So, Mike Gapen, let me start with you as we head into 2026, what are we thinking about? Are we going into a more stable expansion? Is this just a different phase with the same amount of volatility? What do you think is going to be happening in the U.S. as a baseline outlook? And then if we're going to be wrong, which direction would we be wrong? 

Michael Gapen: Yeah, Seth, we took the view that we would have more policy certainty. Recent weeks have maybe suggested we're incorrect on that front. But I still believe that when it comes to deregulation, immigration policy and fiscal policy, we have much more clarity there than we did a year ago. 

So, I think it's another year of modest growth, above trend growth. We're forecasting something around 2.4 percent for 2026. That's about where we finished 2025. 

I think what's key for markets and the outlook overall will be whether inflation comes down. Firms are still passing through tariffs to the consumer. We think that'll happen at least through the end of the first quarter. It's our view that after that, inflation pressures will start to diminish. If that's the case, then we think the Fed can execute one or two more rate cuts.  But we have those coming [in] the second half of the year. So, it looks like growth is strong enough. The labor market has stabilized enough for the Fed to wait and see, to look around, see the effects of their prior rate cuts, and then push policy closer to neutral if inflation comes down. 

Seth Carpente