Morgan Stanley Turns Bullish, Says Fed Will Cut Rates by 25bps This Month

Morgan Stanley has now reversed its previous forecast of how the Fed committee would move in December. They predicted a 25bps Fed rate cut ahead of the upcoming policy meeting next week.

Morgan Stanley Projects Immediate Fed Rate Cut

According to Reuters, the firm now expects the Federal Reserve to cut interest rates by 25 basis points this month. This is a change from its previous expectation that policymakers would stay on hold in December.

The bank shared they changed their view because of the weaker U.S. data released last month. They added that positive comments from Federal Reserve officials also led to the change. They mentioned FOMC Vice Chair John Williams and Governor Christopher Waller as examples.

The firm said they may have also been too quick in its previous analysis. 

“It seems we jumped the gun,” said Morgan Stanley strategists. “We expect dissents, and Chair Powell will likely trade the cut for language changes in the statement that signal further cuts will have a higher bar.”

Morgan Stanley also updated its broader forecast. The bank projected additional 25-basis-point cuts in January and April, leading to a terminal rate between 3.0% and 3.25%. 

“We expect Chair Powell to signal that the recalibration phase of monetary policy is now complete. Any additional adjustments will be considered on a meeting-by-meeting basis and guided by incoming data,” they said.

JPMorgan similarly made a change and forecast a 25bps cut at this meeting. The investment bank had previously argued that the Fed would wait until early 2026.

Will December Deliver the Second Cut of the Year?

Investors across markets are paying close attention to next week’s FOMC meeting. Officials are set to vote on the next potential Fed rate cut and update economic projections.

The 12-member policy committee is still divided on whether the lower rates are needed right now to support a slowing labour market. They are also on whether the higher-for-longer policy is required to suppress inflation. Recent hiring data shows clear signs of cooling, giving momentum to those wanting cuts.

Some Fed officials have also issued warnings that inflation remains a threat. Meanwhile, others said earlier price spikes were unlikely to be sustained. New inflation data released late last week strengthened the case for a rate cut.

According to the CME FedWatch Tool, traders are currently pricing in an 86.2% probability of a quarter-point rate cut at the December 9–10 FOMC meeting.