Morgan Stanley: December Fed Rate Cut Now “More Likely Than Not” Amid Mixed Labor Data
A series of private-sector economic reports released this week have strengthened expectations that the Federal Reserve may move forward with a December interest rate cut, according to Morgan Stanley analysts.
Data published on Thursday by Challenger, Gray & Christmas revealed that U.S. companies announced 153,074 job cuts in October, nearly three times higher than September’s total. This brought total layoffs for the year to more than one million, highlighting growing pressure in the labor market.
At the same time, figures from the Bank of America Institute, based on customer deposit trends, indicated that while the labor market hasn’t slowed drastically since September, it has clearly cooled since the spring.
Earlier in the week, data from ADP showed that U.S. private-sector firms added 42,000 jobs in October, surpassing expectations and recovering from a revised loss of 29,000 in September and another decline in August.
These reports, which carry additional importance amid an ongoing government data blackout caused by the prolonged U.S. government shutdown, suggest that the American labor market is gradually losing momentum.
While a broad immigration crackdown may keep the unemployment rate historically low, several indicators point to slower hiring activity, meaning job seekers could face tougher conditions finding new work.
“Although official data remains limited, we view the current evidence as keeping a December Fed rate cut more likely than not,” said Morgan Stanley analysts Michael Gapen and Sam Coffin in a research note.
They also observed that market expectations for Fed policy have fluctuated sharply, as investors weighed signs of weakening employment against stronger service-sector activity. A key services index rose in October, signaling continued economic strength, but the measure of prices paid climbed to its highest level since 2022, suggesting inflationary pressures may persist.
The Federal Reserve lowered rates by 25 basis points at its October meeting, aiming to prevent further labor market deterioration. However, Fed Chair Jerome Powell has cautioned that another cut this year is not guaranteed, citing internal concerns about reigniting inflation.
In theory, rate cuts can encourage investment and hiring, but they also risk fueling price increases. According to the CME FedWatch Tool, markets currently assign about a 66% chance of another rate cut at the December 9–10 meeting, while 33% expect rates to remain between 3.75% and 4%.
