Morgan Stanley Shifts to Earlier Fed Cuts Amid Powell's Labor Market Concerns

Morgan Stanley has adjusted its expectations for U.S. Federal Reserve interest rate policy, now forecasting a 25-basis-point cut in September 2025, followed by reductions in December 2025 and continuing into 2026. This shift comes after Fed Chair Jerome Powell signaled a reevaluation of labor market risks during his speech at the Jackson Hole symposium. The firm previously anticipated no rate cuts until March 2026 but has now moved its timeline forward in response to Powell’s evolving rhetoric. Morgan Stanley now anticipates a terminal rate of 2.75%-3.0% by the end of 2026, with quarterly reductions throughout the year [1].

Market expectations have also shifted in line with Powell’s comments. According to the CME Group’s FedWatch tool, the probability of a September rate cut has increased to 87%, up from 75% before the Jackson Hole speech [3]. Other major brokerages, including Barclays, BNP Paribas, and Deutsche Bank, have similarly adjusted their forecasts to include a September cut, citing Powell’s remarks as a sign of a potential easing bias [3]. Morgan Stanley, however, remains cautious, estimating a 50% probability for a September reduction, citing uncertainty around inflation and political pressures from President Donald Trump and White House officials [2].

Despite the expectation of a September cut, the path beyond remains unclear. Traders are pricing in a near-certainty for a September cut, but the probability for additional reductions later in the year is more muted. The CME FedWatch data indicates an 82% probability for a September cut but only a 33% expectation for three total rate cuts in 2025 [2]. Morgan Stanley, along with some other analysts, has noted that the Fed may proceed cautiously, particularly if inflation remains a concern or if incoming data contradicts the expected softening in the labor market [2]. This aligns with broader skepticism among some market experts, who argue that the case for aggressive easing is not yet compelling [2].

The potential for rate cuts has had a noticeable impact on financial markets. Stocks surged following Powell’s Jackson Hole speech, with Treasury yields declining significantly. However, the initial optimism faded as investors began to question the timing and magnitude of the Fed’s next moves. Jason Granet, chief investment officer at BNY, emphasized that while a September cut may be likely, the pace of subsequent reductions is less certain [2]. This uncertainty reflects a broader debate among market participants about whether the Fed is responding to temporary labor market issues or preparing for a more prolonged shift in policy.

ING, another major financial institution, has also updated its forecasts, now anticipating 25-basis-point cuts in September, October, and December 2025, followed by a more aggressive 50-basis-point easing in 2026. ING’s terminal rate forecast aligns with the broader market view, projecting a final Fed funds rate of 3.25% by the end of 2026 [4]. The firm also highlighted that rate differentials between the U.S. and the eurozone have become a key driver of the EUR/USD exchange rate, with dovish U.S. monetary policy supporting a stronger euro [4]. This suggests that the Fed’s actions will continue to influence not only U.S. financial markets but also global currency dynamics.

Looking ahead, the timing and pace of the Fed’s rate cuts will depend largely on incoming economic data, particularly in the labor market and inflation readings. If the data continues to show signs of softening, it may encourage a more aggressive easing path. However, should inflationary pressures persist or labor market resilience outperform expectations, the Fed may adopt a more cautious stance. Morgan Stanley, ING, and other major brokerages are closely monitoring these developments, with their forecasts remaining subject to change as new information emerges [1][2][4].

Source: [1] Morgan Stanley expects US Fed to deliver September rate cut, Powell shifts tone (https://www.reuters.com/business/morgan-stanley-expects-us-fed-deliver-september-rate-cut-powell-shifts-tone-2025-08-26/) [2] Markets are sure the Fed will cut in September, but the path from there is much murkier (https://www.cnbc.com/2025/08/25/markets-are-sure-the-fed-will-cut-in-september-but-the-path-from-there-is-much-murkier.html) [3] Major brokerages pivot to Sept Fed rate cut on Powell's labor warning (https://www.reuters.com/business/major-brokerages-pivot-sept-fed-rate-cut-powells-labor-warning-2025-08-25/) [4] EUR/USD: Our latest views (https://think.ing.com/articles/eur-usd-our-latest-views/)