Wall Street giant Morgan Stanley has officially reversed its forecast for the upcoming Federal Reserve policy meeting. The investment bank now predicts the central bank will lower interest rates by 25 basis points in December. This pivot comes after strategists admitted they acted too quickly in their previous call for a pause.
This adjustment aligns Morgan Stanley with the broader market consensus just days before the critical Federal Open Market Committee (FOMC) gathering. The reversal highlights how volatile economic data and central bank rhetoric are currently shaping investment strategies across the globe.
“We Jumped the Gun”: Inside the Reversal
Morgan Stanley economists issued a candid note to clients this week acknowledging their error. The firm had previously argued that the Fed would likely keep rates steady to assess the impact of the U.S. election and recent fiscal shifts. However, incoming data and clear signals from Fed officials forced a rapid change in perspective.
“It seems we jumped the gun,” the strategists wrote in the updated report. The bank noted that recent comments from influential Fed leaders tipped the scales. specifically, Federal Reserve Governor Christopher Waller and New York Fed President John Williams provided commentary that the market interpreted as dovish. Both officials suggested that the current economic landscape warrants a further easing of monetary policy to maintain labor market stability.
The bank now sees a clear path for a rate reduction. They believe Fed Chair Jerome Powell will use the press conference to manage future expectations rather than pause the cutting cycle now.
- Key Shift: From “Hold” to “25bps Cut”
- Reasoning: Dovish Fed speak and cooling inflation data
- Strategist View: Powell will trade a cut for stricter language on future moves
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Morgan Stanley logo on building forecast chart background
Market Odds and Rival Forecasts Align
Morgan Stanley is not alone in this eleventh-hour adjustment. Other major financial institutions are also recalibrating their expectations as the meeting approaches. JPMorgan Chase has similarly solidified its stance, forecasting a quarter-point reduction at the December meeting.
The alignment of these major banks reflects growing confidence that the Fed is not yet done with its “recalibration” phase. The futures market aggressively supports this view. According to the CME Group’s FedWatch Tool, traders are currently pricing in a high probability of a rate cut.
Current Market Expectations:
| Metric | Probability / Data |
|---|---|
| Implied Odds of Cut | ~87% |
| Size of Cut | 25 Basis Points |
| Meeting Date | December 17-18 |
This overwhelming market sentiment puts pressure on the Fed. A surprise hold at this stage could trigger significant volatility in bond and equity markets. Investors are betting that the central bank will validate these expectations to avoid disrupting the year-end financial landscape.
Economic Data Supporting the Move
The decision to cut rates is not just about market vibes. It is rooted in hard data. While the labor market has shown resilience, there are underlying signs of cooling that worry policymakers. The Fed aims to engineer a “soft landing” where inflation returns to target without causing a spike in unemployment.
Recent inflation reports have been mixed but generally supportive of a cut. The Personal Consumption Expenditures (PCE) price index, which is the Fed’s preferred inflation gauge, continues to trend toward the 2% goal. However, “supercore” inflation remains sticky, creating a complex backdrop for the decision.
The Fed is balancing two major risks:
- Cutting too slowly and hurting the job market.
- Cutting too fast and allowing inflation to reignite.
Morgan Stanley’s updated forecast suggests the Fed sees the first risk as the more immediate concern. The bank projects that after this December cut, the Fed may pause or slow its pace in 2025 depending on how the incoming administration’s fiscal policies take shape.
Future Outlook: The Path to 3 Percent
Looking beyond December, Morgan Stanley has outlined a specific trajectory for interest rates. The firm expects the Fed to continue lowering borrowing costs into the new year. Their forecast includes additional 25-basis-point cuts in January and again in April.
This path would bring the federal funds rate down to a “terminal rate” between 3.0% and 3.25%. This level is considered neutral, meaning it neither stimulates nor restricts the economy.
“We expect Chair Powell to signal that the recalibration phase of monetary policy is now complete,” the strategists noted. This implies that future cuts will not be automatic. Instead, the Fed will likely switch to a strict meeting-by-meeting approach.
Investors should prepare for a shift in tone. While the cut seems likely, the accompanying statement may sound more cautious. Powell is expected to emphasize that the bar for future reductions will be higher, requiring clear evidence that inflation is fully defeated.
The upcoming FOMC meeting is shaping up to be a defining moment for 2025 market strategy. With Morgan Stanley back in the “cut” camp, the consensus is strong, but the Fed’s guidance on what comes next will be the real story to watch.
