Morgan Stanley now expects a Fed interest rate cut in September

Morgan Stanley is finally singing along with the choir. For months, the bank had been one of Wall Street’s last hawkish holdouts, insisting that the Federal Reserve wouldn’t touch rates until March 2026.

On Monday, that view gave way. In a note to clients, chief economist Michael Gapen said the Fed is now expected to cut rates in September — an about-face that underscores just how swiftly Jerome Powell’s Jackson Hole pivot has flipped the macro conversation.

Gapen told clients that the Fed is now expected to cut rates by 25 basis points in September, then again in December, followed by quarterly trims through 2026. The terminal destination: a 2.75%–3% Fed funds rate, down from today’s 4.25%–4.5%. The language was clinical, but the climbdown was clear.

Morgan Stanley’s analysts said the Fed is responding less to inflation data than it is to mounting labor-market weakness. July’s employment report included downward revisions to previous months, painting a bleaker picture than headline numbers suggested. “The Fed cutting sooner means the Fed cutting less,” Gapen warned, suggesting that Powell wants to get ahead of a slowdown before it metastasizes into something worse. That nuance matters — early cuts could reduce the eventual depth of easing, but they also telegraph a shift in the Fed’s priorities. Inflation remains part of the dual mandate, but the jobs half of the ledger is suddenly in bold font.

Morgan Stanley’s rationale is Powell’s own pivot. At Jackson Hole, the Fed chair shifted emphasis away from entrenched inflation and toward labor-market risks. Morgan Stanley seized on that change, writing that Powell’s “tone marked a departure from his earlier emphasis on inflation persistence and low unemployment, suggesting the Fed may move preemptively to manage downside risks to the labor market.” Translation: The Fed isn’t waiting for a pink-slip avalanche before acting.

And that was enough for Morgan Stanley to abandon a forecast it had clung to all summer. Weeks ago, it looked contrarian. Today, it looked lonely. Goldman Sachs and JPMorgan have already called for September cuts. Barclays and Deutsche Bank have piled on. BNP Paribas, another holdout, flipped on the same day as Morgan Stanley. With both defectors, the last traces of hawkish skepticism vanished. Betting markets followed suit: LSEG put the odds of a September move at roughly 82%, with CME’s FedWatch tool in the same neighborhood.

​​Still, Morgan Stanley is hedging.

“A September cut is not a certainty,” the note cautioned, and “a large up-front cut would come only with sizeable payroll declines.” The warning was pointed; August jobs and CPI data could still derail the dovish pivot, another “clear acceleration in tariff-related inflation could keep [cuts] on hold,” and Powell could face “dissents against rate cuts in September” inside the FOMC itself. Translation again: Even inevitability comes with caveats.

The stakes stretch beyond Wall Street’s models. Net interest outlays are on track to top $1 trillion this fiscal year — $1.01 trillion through July alone — and budget groups expect the burden to keep climbing over the next decade if rates stay high. As analysts put it, the U.S. government needs lower rates more than anyone. That pressure dovetails with Trump’s steady drumbeat for cuts to revive housing — a political backdrop that Powell can’t entirely ignore, however often he insists on the central bank’s independence.

Morgan Stanley’s message wasn’t just a forecast tweak; it was an acknowledgment of reality. Powell redrew the map in Jackson Hole. Morgan Stanley was one of the last to update its charts. Once the last hawk clips its wings, the chorus sounds less like debate and more like destiny.