Morgan Stanley now expects the Federal Reserve (Fed) to start cutting interest rates in September, following a change in tone from Chairman Jerome Powell at the Jackson Hole symposium. In a research note, the bank’s analysts wrote that Powell showed “greater concern about labor market risks and a bias toward rate cuts for risk management.”
Morgan Stanley’s new forecast is for a 25 basis point cut next month, followed by another 25 basis point cut in December. The Federal Open Market Committee (FOMC) is expected to continue quarterly cuts of 25 basis points until the policy rate reaches 2.75%–3.0% by the end of 2026. This forecast is earlier than the previous forecast that expected the Fed to keep rates on hold until March 2026 before lowering to 2.50%–2.75%.
However, Morgan Stanley stressed that a rate cut in September still appears uncertain. If the August jobs report shows an additional 225,000 jobs or if tariff-related inflation picks up speed, the Fed is likely to delay the move. The bank, adding that a larger cut earlier in the cycle is only likely if the jobs data shows a big drop, did not rule out a disagreement at the September meeting.
The key change, the firm said, is how the Fed now responds to current data. While inflation is expected to remain above its 2% target through the end of the year, policymakers are placing more emphasis on the risks of a labor market slowdown. Morgan Stanley noted that while the cuts may start earlier, the overall easing cycle is slightly smaller than previously forecast.
