Morgan Stanley now anticipates the Federal Reserve will start lowering interest rates as early as September, following a notable shift in tone from Chair Jerome Powell at Jackson Hole.
“We now forecast Fed rate cuts beginning in September,” analysts at Morgan Stanley said, noting that Powell “signaled increased concern over labor market risks and leaned toward rate cuts for risk management.”
The bank’s base case calls for a 25-basis-point reduction next month, followed by an additional 25-basis-point cut in December.
Looking further ahead, Morgan Stanley expects the Federal Open Market Committee to implement “quarterly cuts of 25bps to a terminal of 2.75-3.0% by end-2026.” Previously, the firm had forecast that the Fed would hold rates steady until March 2026 before gradually lowering them to a 2.50-2.75% range by year-end.
However, the analysts cautioned that “a September cut is not a certainty,” pointing out that “payrolls of 225k in August and another clear acceleration in tariff-related inflation could keep them on hold.”
They also noted that a more aggressive early cut would require “sizeable payroll declines,” and potential dissent could emerge at the September meeting.
Morgan Stanley stressed 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 report 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” even as inflation is likely to remain above the 2% target through the end of the year.
This content is for informational purposes only and does not constitute financial, investment, or other professional advice. It should not be considered a recommendation to buy or sell any securities or financial instruments. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.