The firm said it may have jumped the gun on its earlier stance and added that Chair Powell will indicate that further cuts will come at a higher bar.
- Morgan Stanley joins the likes of JPMorgan and BoFA in its stance reversal following weak labor data and recent comments from key Fed officials that suggest a cut.
- The firm now expects a 25 bps rate cut each in January and April 2026, as per the Reuters report.
- The probability of a 25 bps cut in December is at 87.2%, according to data from the CME FedWatch tool.
Morgan Stanley now reportedly expects the Federal Reserve to cut key rates by 25 basis points in its upcoming policy meeting in December. The firm had previously said it expected the Fed to hold rates this month.
The prediction reversal comes amid a struggling labor market and comments from key Fed officials suggesting a softer stance on monetary policy. Morgan Stanley joins peers JPMorgan and Bank of America (BofA), who also reversed their stance in late November and early December, respectively.
"It seems we jumped the gun," Morgan Stanley strategists told Reuters. "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."
The firm expects the Fed to cut rates by 25 basis points each in January and April 2026, to 3%-3.25%, as per the report.
Struggles And Expectations
U.S. companies cut about 32,000 jobs in November, with new additions being flat in the second half of 2025, according to an ADP report. Consulting firm Challenger, Gray & Christmas also reported recently that U.S. employers announced over 1.1 million job cuts from January to November 2025, 54% higher than the same period last year.
Moreover, Federal Reserve Bank of New York President John Williams said in November that he believed there was room for further adjustment in the federal funds rate, stoking expectations for a cut in the upcoming meeting. He joined Fed Governor Stephen Miran, who called for at least a 25 bps cut in the forthcoming meeting.
What Are Others Saying?
Jeremy Siegel, Professor Emeritus of Finance at the University of Pennsylvania’s Wharton School of Business, is also backing a 25 bps cut next week. The economist added that he wouldn’t be surprised if the central bank were hawkish, with the Federal Open Market Committee (FOMC) stating that it is prepared to pause cuts based on the economic data.
According to data from the CME FedWatch tool, the market consensus on the probability of a 25 bps cut in December is 87.2%, up from 62% a month ago.
Meanwhile, U.S. equities were slightly up in Friday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up by 0.22%, the Invesco QQQ Trust ETF (QQQ) was up 0.33%, and the SPDR Dow Jones Industrial Average ETF Trust (DIA) was up 0.14%.
The FOMC will hold its monetary policy meeting on December 9 and 10.
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