Morgan Stanley Sees Fed Rate Cuts Starting In September After Powell's Jackson Hole Shift — Forecasts Steady Easing Through 2026

Investment bank Morgan Stanley says that the Federal Reserve will begin cutting interest rates starting in September, reversing its prior views of the Fed choosing to hold rates steady through March 2026.

Jerome Powell’s Jackson Hole Speech Shifts The Narrative

This shift comes following Fed Chair Jerome Powell’s speech in Jackson Hole on Friday, which indicated a change in the central bank’s policy, now focusing on the labor market crisis, as opposed to inflation targeting, according to a report by Reuters.

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In a note published on Monday, the bank forecasted a 25 basis-point rate cut in September, followed by a steady easing schedule with another cut in December, and quarterly reductions all through 2026, hitting a terminal rate of 2.75% to 3.00%, from the existing benchmark rate of 4.25% to 4.50%.

The CME Group’s FedWatch tool echoes Morgan Stanley’s predictions, with the odds of a rate cut in September now at 80.9%, and a 79.5% probability of another cut in December.

Other Banks And Analysts Weigh In

Morgan Stanley’s forecasts follow the lead of other Wall Street banks, with analysts at JPMorgan Chase and Goldman Sachs both predicting a rate cut in September two weeks ago.

Citing soft GDP growth and labor market weakness, the analysts expect three more 25 basis-point cuts following the September move, before the Fed decides to pause.

As federal interest payments touch $1.2 trillion, analysts say “the US government needs lower rates more than anyone,” adding that this interest expense could reach as high as $1.4 trillion in 2026, if interest rates remain elevated, and the Fed fails to cut.

While President Donald Trump has repeatedly called for rate cuts to spruce up the housing market, economist Peter Schiff believes that cutting the rates could lead to higher mortgage rates.

“The last time the Fed cut rates, mortgage rates rose. The same thing is likely to happen if the Fed cuts again. Maybe by not cutting, Powell is helping housing,” Schiff said in a post on X last week.

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