(Reuters) -Morgan Stanley has joined a growing bloc of global brokerages forecasting a September interest rate cut by the U.S. Federal Reserve, citing Chair Jerome Powell’s shift in tone toward labor market risks at the Jackson Hole symposium.
In a note dated Monday, the brokerage said 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.
Morgan Stanley now forecasts two 25-basis-point rate cuts this year, one in September and another in December, followed by quarterly 25bp reductions through 2026, bringing the benchmark interest rate to 2.75%-3.0%.
That’s a shift from its previous view that the central bank would stay on hold until March 2026 and cut more aggressively thereafter.
Powell’s remarks on Friday triggered a wave of revised forecasts across brokerages, with Barclays, BNP Paribas and Deutsche Bank expecting a 25-basis-point cut next month. Traders are now pricing in an 81.9% chance of a September move, according to LSEG data.
The change in forecasts reflect what the economists called a shift in the Fed’s “reaction function,” with Powell now appearing more sensitive to labor market deterioration than before.
“A large up-front cut would come only with sizeable payroll declines,” Morgan Stanley noted, referring to cuts bigger than 25 bps. “The Fed may also see dissents against rate cuts in September.”
The Trump administration’s effort to steer the Fed towards more aggressive rate cuts intensified on Monday night, with the president announcing plans to remove Governor Lisa Cook over alleged mortgage fraud.
JPM analysts, in a separate note, warned the move could open vacancies on the Board of Governors and potentially shift the balance of power within the FOMC.
BofA Global Research remains the only major brokerage still forecasting no rate cuts this year.
The rate-setting Federal Open Market Committee (FOMC) is scheduled to meet on September 16 and 17.
(Reporting by Rashika Singh in Bengaluru; Editing by Janane Venkatraman)