Morgan Stanley Expects Fed Rate Cut in September, But Cautions Outcome Is Not Certain

Key TakeawaysMorgan Stanley maintains its forecast for two Fed rate cuts in 2025, starting in September.The bank warns that strong jobs data or tariff-driven inflation could delay easing.Internal divisions among Fed policymakers add uncertainty, but the firm still sees a dovish path through 2026.Fed Cut Expected, But Not GuaranteedMorgan Stanley has reiterated its view that the U.S. Federal Reserve will cut interest rates in September, but cautioned that the decision is not guaranteed.The investment bank said that robust employment data or a sharp rebound in inflation due to tariffs could prompt the Fed to delay its move, despite rising market expectations for an early cut.Internal Debate Within the FedAccording to the note, divisions within the Federal Reserve could further complicate the decision-making process. Some policymakers may argue that the central bank is cutting rates too soon, while others could point to weakening labor conditions and investor bets on easing as reasons to act now.Longer-Term Outlook: Dovish Through 2026Despite short-term uncertainty, Morgan Stanley expects the Fed to maintain a dovish stance in 2026 and beyond. The firm projects quarterly rate cuts through 2026, with the federal funds rate stabilizing between 2.75% and 3.00%.