Regarding interest rate cuts, there is a significant divergence on Wall Street: Morgan Stanley expects no cuts this year, while Citigroup believes there will be a cut in September

The internal divisions within the Federal Reserve have reached a ten-year high, and Wall Street's views have also become polarized.

Wall Street Insights previously mentioned that according to the June dot plot, Federal Reserve officials' predictions for interest rates in 2025 show a polarized distribution, with the degree of disagreement reaching a ten-year high. Meanwhile, Wall Street investment banks have also shown differing opinions on the timing of interest rate cuts this year.

According to the Chase Trading Desk, Morgan Stanley stated in its latest research report that due to inflationary risks and tariffs, it expects no interest rate cuts throughout 2025, while Citigroup anticipates that a rate-cutting cycle may begin as early as September, with subsequent cuts at each meeting until the policy rate reaches 3-3.25%.

Morgan Stanley and Citigroup's Predictions Diverge

Morgan Stanley's report clearly states that given the inflationary pressures and the drag of tariffs on consumption and business spending, there will be no interest rate cuts in 2025 and that a 175 basis point rate-cutting cycle is expected to start in 2026.

Morgan Stanley analyzes that the June FOMC meeting minutes were hawkish, with “most” officials still concerned that tariffs could lead to persistent inflation and even shake inflation expectations. If inflation accelerates between June and September, more officials may lean towards maintaining current policies.

In contrast, Citigroup's research report is confident about a rate cut in September.

According to Citigroup's analysis, although the June meeting minutes showed that some officials were increasingly worried about inflation risks, the pressure from inflation is expected to ease with future data releases, and signs of a weakening labor market will become more evident.

Citigroup expects that after the September FOMC meeting, the Federal Reserve will initiate rate cuts and continue to cut rates at each subsequent meeting until the policy rate reaches 3-3.25%. Citigroup also noted that the current unemployment rate remains stable at 4.1%, making the likelihood of a rate cut in July very low, but September will be a key turning point.

The Federal Reserve Sends Mixed Signals Internally

When discussing the internal divisions regarding the policy path at the Federal Reserve, Citigroup stated that “most” participants believe that a rate cut later this year is appropriate, aligning with the median forecast of the dot plot (two rate cuts); however, “some” participants (as indicated by the dot plot showing 7 individuals) expect no rate cuts this year.

Morgan Stanley emphasized that the discussion of inflation in the minutes was more hawkish than Chairman Powell's statements at the press conference, especially regarding the persistence of tariff impacts. Most participants believe that if tariffs lead to supply chain disruptions or decreased productivity, upward pressure on inflation may be greater.

Morgan Stanley further pointed out that although “many participants” believe that if “trade agreements are reached quickly,” the impact of tariffs on inflation may be limited, the effective tariff rate has risen from 13% to 17-18% since the June meeting, making tariff concerns more realistic.

Both reports mention an increased discussion of the downside risks in the labor market.

Citigroup noted that “a few” participants have observed signs of further weakness in the labor market, such as the fact that behind the 4.1% unemployment rate, some workers have exited the labor market due to a loss of confidence Morgan Stanley also mentioned that if the labor market or economic activity "significantly deteriorates," the Federal Reserve may adopt a more accommodative policy stance.

However, at present, both parties believe that the likelihood of a rate cut in July is extremely low, as the unemployment rate and employment growth data do not support immediate action.