US Fed Expected to Cut Rates in September, Starting with 25-Basis-Point Reduction: Morgan Stanley

Morgan Stanley now expects the US Federal Reserve to begin cutting interest rates in September, with a 25-basis-point cut forecasted for next month, followed by another in December. The brokerage predicts quarterly reductions through 2026, with a terminal rate of 2.75%-3.0%. This shift in expectations follows Chair Jerome Powell's comments at Jackson Hole, which signaled a focus on labor market risks.

Following Chair Jerome Powell's remarks at the Jackson Hole Symposium, Morgan Stanley has revised its expectations for US Federal Reserve interest rate policy. The brokerage now anticipates the Fed to begin cutting interest rates in September, with a 25-basis-point reduction forecasted for that month, followed by another cut in December. Morgan Stanley predicts quarterly reductions through 2026, culminating in a terminal rate of 2.75%-3.0% [1].

These adjustments in expectations come as the Federal Reserve shifts its focus towards labor market risks, as highlighted by Chair Powell's recent comments. The Fed has been monitoring the economy's resilience amidst sweeping changes in economic policy and has indicated that it remains committed to its dual-mandate goals of maximum employment and stable prices [2].

The Federal Reserve's policy rate is currently 5-1/4 to 5-1/2 percent, and Morgan Stanley's predictions suggest that the rate could fall to a range of 2.75%-3.0% by the end of 2026. This shift in expectations reflects the brokerage's assessment of the current economic conditions and the near-term outlook for monetary policy. The Fed has signaled that it will balance both sides of its dual mandate, taking into account the risks to inflation and employment [2].

While the Federal Reserve has maintained a restrictive policy stance to bring down inflation and foster a sustainable balance between aggregate demand and supply, recent developments, such as higher tariffs and tighter immigration policies, have led to a shifting balance of risks. The Fed has noted that distinguishing cyclical developments from trend or structural developments is challenging, and it will continue to monitor these factors closely [2].

Investors and financial professionals should closely monitor the Federal Reserve's policy decisions and the subsequent impact on the US economy. As the Fed adjusts its policy stance, it will consider the evolving economic conditions and the balance of risks to employment and inflation. The brokerage's forecast suggests that the Fed may adopt a more accommodative monetary policy stance to support the economy in the face of potential downside risks to employment [2].

References:
[1] https://www.marketscreener.com/news/morgan-stanley-rates-nhf-as-equal-weight-ce7c50d8df8af52c
[2] https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm