• Morgan Stanley anticipates the Federal Reserve will begin a rate-cutting cycle in September 2025, a shift from its prior forecast.
  • The bank projects a 25 basis point cut next month, followed by another in December, and subsequent quarterly cuts to a terminal rate of 2.75–3.0% by the end of 2026.
  • The new outlook, which is earlier but slightly shallower than before, hinges on incoming economic data, with strong payrolls or tariff-driven inflation posing a risk to the timeline.

Morgan Stanley has revised its outlook for U.S. monetary policy, now forecasting that the Federal Reserve will commence its easing cycle with a 25 basis point interest rate cut in September 2025. This pivot in the bank’s analysis follows remarks from Fed Chair Jerome Powell at the Jackson Hole symposium, where he signaled heightened concern over mounting risks to the labor market.

The updated projection calls for an initial cut in September, a follow-up reduction in December, and then a series of quarterly 25bp cuts. This path would bring the federal funds rate down to a terminal range of 2.75–3.0% by the conclusion of 2026. This revised forecast represents an earlier start to easing than the bank had previously modeled, though the overall depth of the cycle is now seen as slightly more shallow.

A September move, however, is not a foregone conclusion. The timing remains highly conditional on the evolution of key economic indicators. Strong payroll reports in the coming months or a resurgence in inflation, potentially fueled by new trade tariffs, could easily delay the Fed's first move, according to the analysis. The firm’s economists are closely monitoring data flows for confirmation of a cooling economy, which would provide the necessary cover for the central bank to act.

The forecast comes as the firm itself continues to post robust financial results. Morgan Stanley reported net revenues of $16.8 billion in its most recent quarter, a significant increase from the $15.0 billion recorded a year earlier. This performance, particularly the strength in its wealth management division which saw net new client assets of $59 billion, underscores the firm's resilience across various market environments.

When reached for comment on the revised forecast, a Morgan Stanley spokesperson referred to the firm's published research. The Fed itself does not comment on analyses from private institutions.

With the potential for a dramatic reversal in the interest rate environment that has defined the last few years, investors globally are reassessing asset allocations. All eyes are now fixed on the next rounds of employment and inflation data, which will ultimately determine if the path to lower borrowing costs begins this autumn.