Morgan Stanley changes stance: from "do not believe in interest rate cuts this year" to "expect interest rate cuts in September"

Morgan Stanley has made a significant shift in its stance, joining the ranks of Wall Street giants predicting that the Federal Reserve will cut interest rates in September. Currently, the market consensus has shifted towards expectations of a monetary policy change in the near term.

In a report released on Monday, the bank now expects the Federal Reserve to implement two rate cuts of 25 basis points each this year, in September and December. This forecast sharply contrasts with the bank's previous view, which held that the Federal Reserve would maintain interest rates until March 2026.

The direct catalyst for this shift was Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole Global Central Bank Conference. Analysts believe that Powell's tone has changed noticeably, shifting from a previous emphasis on persistent inflation and low unemployment to expressing greater concern about potential risks in the labor market.

Following Powell's speech, market expectations were quickly reshaped. According to LSEG data, traders now believe there is an 81.9% chance of a 25 basis point rate cut in September.

Federal Reserve's Policy Focus Shifts to the Labor Market

Morgan Stanley noted in its report released on Monday that Powell's remarks signify a notable shift in the Federal Reserve's policy focus. Previously, the Federal Reserve emphasized the persistence of inflation and low unemployment, but now it is more concerned about potential risks in the labor market.

The bank anticipates that after two rate cuts this year, the Federal Reserve will begin quarterly cuts of 25 basis points starting next year, until 2026, ultimately guiding the benchmark rate to a range of 2.75%-3.0%.

However, the bank also added important caveats in its report. Analysts pointed out that the Federal Reserve might only consider larger cuts exceeding 25 basis points in the event of "a significant decline in employment data." Additionally, Morgan Stanley expects that even if the Federal Reserve decides to cut rates in September, this move may face opposition within the Federal Open Market Committee (FOMC). The next FOMC meeting is scheduled for September 16-17.

Morgan Stanley is not alone in this view. Following Powell's speech last Friday, Wall Street quickly saw a wave of revised forecasts. Global brokerages such as Barclays, BNP Paribas, and Deutsche Bank have updated their outlooks, expecting the Federal Reserve to cut rates by 25 basis points next month. However, not all institutions have shifted their stance. Among major brokerages, Bank of America Global Research is currently the only one still predicting that the Federal Reserve will not cut rates this year.

As the market reassesses the Federal Reserve's policy path, political pressure from Washington is also increasing. Trump announced yesterday plans to replace Federal Reserve Governor Lisa Cook on allegations of mortgage fraud. Analysts at JP Morgan warned in a separate report that this move could lead to vacancies on the Federal Reserve Board and potentially alter the balance of power within the FOMC, adding more uncertainty to the future direction of monetary policy.

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