Morgan Stanley Predicts Fed Rate Cuts in September and December, Shifting Market Expectations

Morgan Stanley has reversed its stance on U.S. interest rates, now forecasting two Federal Reserve cuts in 2025—25 basis points in September and another in December—with additional easing expected in 2026. This marks a sharp pivot from its earlier projection of no cuts this year.

The revision follows Fed Chair Jerome Powell's nuanced remarks at Jackson Hole, where he shifted focus from inflation risks to growing labor market concerns. "Powell's tone signaled a potential preemptive MOVE to mitigate downside risks to employment," Morgan Stanley noted, anticipating a gradual reduction to 2.75%-3.0% by 2026.

Other major banks, including Barclays and Deutsche Bank, align with a September cut, while ING projects three consecutive cuts starting next month. Market pricing reflects consensus, with LSEG and CME FedWatch showing over 80% probability of a September move. Bank of America remains the lone holdout, expecting rates to hold steady.