Morgan Stanley now expects the U.S. Federal Reserve to start cutting interest rates in September, pointing to a shift in tone from Chair Jerome Powell during his Jackson Hole speech.
“We now forecast Fed rate cuts beginning in September,” analysts at the bank said, noting that Powell expressed greater concern over labor market risks and appeared to favor cuts as part of a risk management strategy.
Morgan Stanley’s baseline outlook is for a 25 basis point reduction in September, followed by another 25 basis point cut in December. From there, the firm projects the Federal Open Market Committee (FOMC) will move to quarterly 25bp cuts, bringing rates down to a range of 2.75%–3.0% by the end of 2026.
This is a shift from its earlier forecast that the Fed would hold rates until March 2026 before cutting to 2.50%–2.75% by year-end. Analysts cautioned, however, that a September cut is not guaranteed. Strong August payrolls of around 225,000 or an acceleration in tariff-related inflation could keep the Fed on hold.
The bank also suggested that a larger initial cut would require significant payroll weakness, and that some Fed officials may dissent at the September meeting. Overall, Morgan Stanley stressed that while the timing of cuts has changed, the expected endpoint of the easing cycle remains broadly the same. A Fed that begins cutting earlier may ultimately deliver fewer total reductions.
Analysts added that the central bank appears to be putting more emphasis on downside labor market risks, even as inflation remains above the 2% target into year-end.
