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Investing.com -- Morgan Stanley now expects the Federal Reserve to begin lowering interest rates in September, citing a shift in tone from Chair Jerome Powell at Jackson Hole.
“We now forecast Fed rate cuts beginning in September,” analysts at Morgan Stanley wrote, adding that Powell “signaled increased concern over labor market risks and leaned toward rate cuts for risk management.”
The bank’s baseline is for a 25 basis point reduction next month, followed by another 25 basis point cut in December.
Morgan Stanley projects the Federal Open Market Committee will then move to “quarterly cuts of 25bps to a terminal of 2.75-3.0% by end-2026.”
That compares with a prior forecast that the Fed would stay on hold until March 2026 before cutting to a 2.50-2.75% range by year-end.
The firm cautioned that “a September cut is not a certainty,” noting that “payrolls of 225k in August and another clear acceleration in tariff-related inflation could keep them on hold.”
Analysts also said a larger up-front move would require “sizeable payroll declines,” with potential dissents at the September meeting.
Morgan Stanley emphasized that “the net effect of our change in the Fed’s policy path is fairly minor. We project the Fed to cut sooner, but finish its cutting cycle about where we had forecasted previously. On net, we have 25bp fewer rate cuts now than before. A Fed that cuts sooner may cut less.”
The note added that “what has changed, in our mind, is the Fed’s reaction to this data flow,” with policymakers “putting more weight on downside risks to labor markets” despite inflation likely staying above the 2% target into year-end.