Wall Street Divided on 2025 Interest Rate Cuts, Morgan Stanley Predicts No Cuts, Citibank Sees September Start

Wall Street analysts are divided over the prospect of interest rate cuts this year. Morgan Stanley, in its latest report, predicts that due to inflation risks and tariff impacts, there will be no interest rate cuts for the entire year of 2025. The firm expects that a reduction cycle of 175 basis points will only begin in 2026. In contrast, Citibank anticipates that the interest rate reduction cycle could commence as early as September, with potential cuts at every subsequent meeting until the policy rate reaches 3-3.25%.

This divergence in opinions highlights the uncertainty and varying perspectives within the financial community regarding the future direction of monetary policy. The differing views are influenced by the recent Federal Open Market Committee (FOMC) meeting minutes, which were seen as hawkish. The minutes indicated that most officials are concerned about the potential for tariffs to cause persistent inflation, which could undermine inflation expectations. If inflation accelerates between June and September, more officials may lean towards maintaining the current policy.

Citibank, however, is more optimistic about a September rate cut. The firm believes that while the June meeting minutes showed increased concern about inflation risks, future data releases may indicate easing inflation pressures. Additionally, signs of a weakening labor market could further support the case for a rate cut. Citibank predicts that the FOMC will initiate a reduction cycle in September, continuing with cuts at each subsequent meeting until the policy rate reaches 3-3.25%. The firm notes that the current unemployment rate of 4.1% makes a July rate cut unlikely, but September could be a pivotal point.

Both Morgan Stanley and Citibank acknowledge the complex signals coming from within the Federal Reserve. While most participants believe that a rate cut later this year is appropriate, aligning with the median projection of two cuts, a significant minority (seven participants) do not expect any cuts this year. Morgan Stanley emphasizes that the minutes' discussion on inflation was more hawkish than Chairman Powell's press conference remarks, particularly regarding the persistence of tariff impacts. Most participants agree that if trade agreements are reached quickly, the impact of tariffs on inflation could be limited. However, effective tariff rates have risen from 13% to 17-18% since the June meeting, making tariff concerns more immediate.

Both reports highlight the increasing discussion within the Fed about the downside risks to the labor market. Citibank notes that some participants are already observing signs of further labor market weakness, such as workers exiting the labor force due to loss of confidence. Morgan Stanley also mentions that if the labor market or economic activity significantly deteriorates, the Fed may adopt a more accommodative policy stance. However, both firms agree that a July rate cut is unlikely, as current unemployment and job growth data do not support immediate action.