Morgan Stanley’s Stunning Reversal: Fed Rate Cuts Now Expected in September & December

Wall Street's crystal ball just got a major recalibration.

The Pivot Everyone Missed

Morgan Stanley abruptly shifts its entire interest rate forecast—ditching previous hawkish stance for two concrete cuts before year-end. No vague timelines here: September and December now anchor their revised outlook.

Why The Sudden Flip?

Economic indicators finally tipped the scales. Cooling inflation and softening labor data forced the hand—even the biggest banks can’t ignore the writing on the wall forever. They’re just late to the party, as usual.

Markets React—Because Of Course They Do

Traders immediately price in the new reality. Bonds rally, equities perk up—because nothing moves markets faster than the Fed changing its mind. It’s almost like someone finally read the economic tea leaves correctly.

Another classic case of Wall Street catching up to what the rest of us already sensed—cut the rates already, the economy’s tired of waiting.

Morgan Stanley has flipped its outlook on U.S. interest rates. The bank now predicts the Federal Reserve will cut rates twice in 2025 – by 25 basis points in September and again in December, followed by more in 2026.

Just weeks ago, it expected no cuts at all this year.

Why the change? Here’s what you should know. 

Powell Shifts Tone at Jackson Hole

The change comes after Fed Chair Jerome Powell struck a different note at the Jackson Hole symposium. Instead of stressing inflation risks, Powell pointed to growing concerns about the U.S. labor market.

Morgan Stanley wrote that Powell’s “tone marked a departure from his earlier emphasis on inflation persistence and low unemployment, suggesting the Fed may MOVE preemptively to manage downside risks to the labor market.”

Under its new forecast, the bank expects steady 25 bps cuts through 2026, with rates sliding toward 2.75%-3.0%.

More Banks Join In

Morgan Stanley isn’t alone. Barclays, BNP Paribas, and Deutsche Bank also expect a 25 bps cut next month. ING has gone further, projecting 25 bps cuts in September, October, and December 2025, followed by a larger 50 bps easing in 2026.

Markets agree – LSEG data shows traders now pricing an 81.9% chance of a September move. The CME FedWatch puts the probablilty of 84.3% now.

The outlier is Bank of America, which still believes the Fed will keep rates unchanged this year.

Trump Adds Political Pressure

The outlook is also being shaped by politics. On Monday night, President TRUMP said he plans to remove Fed Governor Lisa Cook over alleged mortgage fraud.

JPMorgan analysts warned this could create vacancies at the central bank and shift the balance of power inside the FOMC, raising fresh questions about how independent Fed decisions will remain.

Understandably, Morgan Stanley has thus kept a cautious tone, assigning only a 50% probability for a September cut as it weighs ongoing inflation risks and political pressure from Trump and WHITE House officials.

All Eyes on September FOMC

Morgan Stanley also warned that a bigger cut WOULD only come “with sizeable payroll declines” and said the Fed could see dissent at its next meeting.

That meeting is set for September 16-17, and it’s already one of the most anticipated events of the year. For markets, and especially for crypto traders, a Fed pivot toward easier policy could revive the liquidity trade that drives Bitcoin and other digital assets.