Morgan Stanley says that the outlook for the economy in the United States continues to darken, and it’s downgrading its U.S. forecast for 2008 and 2009 as a result.

The firm has reduced its 2008 growth forecast from 1.3% to 0.7% (on a Q4 over Q4 basis), and cutting the 2009 forecast from 3.2% to 2.9%. “In our view, the recession we’ve expected since December is now more fully evident. The economic debate is now shifting to how deep and long it will be and what will be the shape of the ensuing recovery,” it says.

Morgan Stanley says that it expects the downturn will be short and shallow, thanks to aggressive monetary and fiscal stimulus and support from overseas growth. “But we’re now more pessimistic about the pace of recovery into 2009,” it adds, pointing to a deepening credit crunch, higher energy and food prices, and growing consumer caution in the face of declining household wealth.

“As a result, we now expect the Fed to cut the federal funds rate by 75 basis points to 2.25% at the March 18 FOMC meeting; previously we thought the FOMC would trim the rate by 50 bps,” it says. “We continue to think that the FOMC will reduce the funds rate in April by another 50 bps; together with the more aggressive March move, that would take it to 1.75%.”

“We believe that this sub-2% level will represent the trough in short-term rates for this cycle, and that the Fed will keep such rates low for much of 2008,” it says, allowing that there is a growing perception that “even aggressive monetary ease and fiscal stimulus may not be sufficient to counter the depressing effects of a deepening credit crunch.”