Morgan Stanley Revises U.S. Federal Reserve Rate Cut Forecast

Morgan Stanley has adjusted its forecast for a U.S. Federal Reserve interest rate cut, now predicting a reduction of 25 basis points in December. This shift aligns the firm with J.P. Morgan and BofA Global Research, following recent comments from Fed officials that suggest a more dovish outlook. Previously, all three brokerages anticipated that the Federal Reserve would maintain its current interest rates through December.

Recent economic data from the United States has indicated a slowdown, prompting the change in expectations. Key figures from the Federal Reserve, including John Williams, President of the New York Federal Reserve and Vice Chair of the Federal Open Market Committee, along with Christopher Waller and Mary Daly, have contributed to this revised outlook with their cautious remarks.

“It seems we jumped the gun,” said Morgan Stanley strategists. They anticipate that dissenting opinions may arise among Fed officials, and that Chair Jerome Powell may seek to balance the announcement of a rate cut with language that indicates future cuts will require more substantial justification.

Market traders are currently pricing in a 87.2 percent probability of a quarter-point rate cut at the Federal Open Market Committee meeting scheduled for December 9-10, 2023, according to the CME FedWatch Tool. Morgan Stanley has also revised its expectations for future cuts, now predicting reductions in both January and April, aiming for a terminal rate of 3.0 percent to 3.25 percent. This is a change from their earlier forecast, which included cuts in June as well.

The firm stated, “We expect Chair Powell to signal that the recalibration phase of monetary policy is now complete. Any additional adjustments will be considered on a meeting-by-meeting basis and guided by incoming data.”

In parallel, J.P. Morgan also anticipates another rate cut in January, while BofA Global Research is forecasting cuts in both June and July of next year. As the Federal Reserve prepares for its upcoming meeting, the implications of these predictions could significantly influence market conditions and economic policy moving forward.