Brokerages shift expectations after dovish Fed signals
Morgan Stanley now forecasts that the U.S. Federal Reserve will cut interest rates by 0.25% in December, reversing its previous view that rates would remain unchanged. The shift aligns the firm with J.P.Morgan and BofA Global Research, as cooling U.S. data and supportive Fed commentary strengthen the case for early policy easing.
Recent remarks from key policymakers, including John Williams, Christopher Waller and Mary Daly, have signaled that tighter monetary policy may no longer be necessary. Data in late November also pointed to a softer economic backdrop, adding momentum to expectations for an imminent rate cut.
Market pricing strongly favors a December move
Traders have sharply increased bets on a reduction at the December 9-10 Federal Open Market Committee meeting. According to the CME FedWatch Tool, there is now an 87.2% probability of a quarter-point cut, reflecting a broad market shift from stability to easing expectations.
Morgan Stanley strategists acknowledged they “jumped the gun” in their earlier forecast and now expect dissenting votes within the committee. They anticipate Chair Jerome Powell may balance a rate cut with more cautious policy language to prevent markets from assuming aggressive easing ahead.
Recalibration phase may be ending
Morgan Stanley sees cuts of 25 basis points in both January and April as well, bringing interest rates to a target range between 3.0% and 3.25%. This is a change from earlier forecasts that included an additional reduction in June.
Strategists expect Powell to indicate that the Fed’s policy adjustment period is nearing completion and that future moves will depend on incoming economic data rather than a preset path.
Wall Street views diverge on 2026 policy trajectory
Expectations for later cuts differ across major banks. J.P.Morgan anticipates an additional rate reduction in January, while BofA sees further easing arriving in June and July. Despite variations in timing, all three institutions expect the Fed to lower borrowing costs as inflation and economic activity moderate.
