-
Morgan Stanley now expects two Fed rate cuts in 2025, starting in September and again in December.
-
Powell’s Jackson Hole remarks signaled a shift from inflation concerns to labor market risks.
-
Trump’s push to remove Fed Governor Lisa Cook adds political pressure ahead of the September FOMC meeting.
Morgan Stanley has flipped its outlook on U.S. interest rates. The bank now predicts the Federal Reserve will cut rates twice in 2025 – by 25 basis points in September and again in December, followed by more in 2026.
Just weeks ago, it expected no cuts at all this year.
Why the change? Here’s what you should know.
Powell Shifts Tone at Jackson Hole
The change comes after Fed Chair Jerome Powell struck a different note at the Jackson Hole symposium. Instead of stressing inflation risks, Powell pointed to growing concerns about the U.S. labor market.
Morgan Stanley wrote 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.”
Under its new forecast, the bank expects steady 25 bps cuts through 2026, with rates sliding toward 2.75%-3.0%.
More Banks Join In
Morgan Stanley isn’t alone. Barclays, BNP Paribas, and Deutsche Bank also expect a 25 bps cut next month. ING has gone further, projecting 25 bps cuts in September, October, and December 2025, followed by a larger 50 bps easing in 2026.
Markets agree – LSEG data shows traders now pricing an 81.9% chance of a September move. The CME FedWatch puts the probablilty of 84.3% now.
The outlier is Bank of America, which still believes the Fed will keep rates unchanged this year.
Trump Adds Political Pressure
The outlook is also being shaped by politics. On Monday night, President Trump said he plans to remove Fed Governor Lisa Cook over alleged mortgage fraud.
JPMorgan analysts warned this could create vacancies at the central bank and shift the balance of power inside the FOMC, raising fresh questions about how independent Fed decisions will remain.
Understandably, Morgan Stanley has thus kept a cautious tone, assigning only a 50% probability for a September cut as it weighs ongoing inflation risks and political pressure from Trump and White House officials.
All Eyes on September FOMC
Morgan Stanley also warned that a bigger cut would only come “with sizeable payroll declines” and said the Fed could see dissent at its next meeting.
That meeting is set for September 16-17, and it’s already one of the most anticipated events of the year. For markets, and especially for crypto traders, a Fed pivot toward easier policy could revive the liquidity trade that drives Bitcoin and other digital assets.
The stage is set. September could be the month the Fed changes course.
