Morgan Stanley Predicts 25bps Fed Cut in December, Markets React Quickly
Morgan Stanley has made a sudden about-face on where it thinks the Federal Reserve is heading, now forecasting a 25-basis-point...
Quick overview
- Morgan Stanley now forecasts a 25-basis-point rate cut by the Federal Reserve in December, a significant change from their previous stance.
- The shift in outlook is influenced by disappointing U.S. economic data and comments from key Fed officials.
- Analysts expect further rate cuts in January and April 2025, with a terminal Fed rate projected between 3.0% and 3.25%.
- Investors are closely monitoring the upcoming FOMC meeting, as any changes in policy language could greatly impact market reactions.
Morgan Stanley has made a sudden about-face on where it thinks the Federal Reserve is heading, now forecasting a 25-basis-point rate cut in December. This is a sharp reversal from where they were just a little while ago, when they figured nothing was going to change. The change of heart comes after some underwhelming U.S. economic data, and a few key Fed officials, including FOMC Vice Chair John Williams and Governor Christopher Waller, have been making some pretty pointed remarks.
Morgan Stanley’s strategists have admitted that the analysis they put out a while back was premature. “We kind of got out ahead of ourselves”, is what they’re saying, with the bank noting that there’s a good chance that there’s still a fair amount of disagreement within the FOMC. Analysts expect Fed chair Jerome Powell to go ahead and cut rates while sending clear signals that any further cuts down the line will be conditional.
- Anticipated rate cut: 25 basis points in December.
- Additional cuts are projected for January and April 2025.
- Terminal Fed rate forecast: 3.0-3.25%
Morgan Stanley is also saying that Powell might spin the Fed’s current shift in policy as complete, that they’re fully adjusted & re-oriented now, and that any further changes will be data-driven and likely reviewed on a meeting-by-meeting basis.
Implications for Investors
Everyone’s eyes are on next week’s FOMC meeting – Investors & financial markets are pretty skittish about it. The 12-person policy committee still can’t seem to agree on what to do – some want to cut rates to try and get the labor market going again, while others are worried that cutting rates too much could fan the flames of inflation. The recent job numbers have clearly shown that the labor market is slowing, likely making it harder for the Fed to resist a cut.
While some Fed officials are still warning about the risks of inflation, others are pointing out that the wild price surges we saw a while back are unlikely to be sustainable. The new inflation numbers released just last week have only stoked expectations of a rate cut.
- CME FedWatch Tool is showing an 86.2% chance of a 25bps cut
- Markets are super sensitive to even the smallest changes in FOMC language or projections.
- And of course, investors are hanging on to Powell’s every word, trying to get a read on what comes next from him
Broader Forecast and Market Reaction
Morgan Stanley has also revised its long-term outlook to anticipate further rate cuts in January and April, targeting a terminal rate of 3.0%-3.25%. JPMorgan is basically in line with this thinking, forecasting a cut in December when they’d previously thought the Fed would stay put till early 2026.
This shift in thinking at Morgan Stanley and elsewhere reflects a broader rethink of where the Fed is headed – the Fed’s policy path may be more accommodating than people were initially thinking. And traders & investors are watching the FOMC with bated breath, knowing that even a tiny tweak in the FOMC’s policy statement can send markets into a tizzy.
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