Morgan Stanley pivots, now expects quarter point Fed cut in December

Morgan Stanley on Friday reversed an earlier view and said it now expects the Federal Reserve to cut its policy rate by 25 basis points at the December meeting. The bank said dovish commentary from key Fed officials, together with softer U.S. economic readings in late November, prompted the change and moved it into closer alignment with forecasts from J.P. Morgan and BofA Global Research.

Traders were already pricing a high probability of a December cut, with the CME FedWatch tool showing roughly an 87 percent chance. That market signal, combined with weaker growth signals from labor and consumer spending data late last month, convinced Morgan Stanley strategists to bring forward easing and to plot an easing path through the first half of 2026.

Morgan Stanley cautioned that the move will not be uniform inside the Federal Open Market Committee. The bank said it still expects dissents at the meeting and flagged the possibility that Chair Jerome Powell may accept a cut while tempering the policy statement with more cautious language. The firm now envisages two additional 25 basis point reductions in January and April 2026, taking a terminal rate to a range of 3.0 percent to 3.25 percent.

The shift crystallizes a broader market reassessment away from a prolonged restrictive stance to an easing cycle that could lower short term borrowing costs by mid 2026. For households and businesses, that would mean cheaper rates on new adjustable mortgages, business loans, and some consumer credit instruments over the months ahead, provided the projected cuts materialize and work through markets.

Policy makers face a balancing act. A December cut would be a signal that the Fed views recent cooling in activity as sufficient to begin removing restrictive policy. At the same time, persistent inflation above the central bank's 2 percent target would limit the scope and pace of easing. Morgan Stanley's expectation of dissents underscores the continued presence of officials reluctant to lower rates until they are confident inflation is sustainably under control.

Market implications extend beyond rates. An easing trajectory typically supports risk assets, narrows credit spreads, and can prompt emerging market capital inflows back into equities and bonds. It can also weaken the U.S. dollar if the gap in policy expectations with other major central banks widens. Financial conditions that ease too quickly risk lifting inflation again, presenting a potential policy reversal for the Fed later in 2026.

Investors will watch closely for the Fed's statement language, the tone of Powell's post meeting remarks, and incoming data in the next weeks for signs the central bank intends to follow the path markets and some major banks now envisage. With the December meeting imminent and traders largely priced in a cut, attention will turn to whether the FOMC delivers on the easing and how it signals the pace of subsequent moves toward the 3.0 percent to 3.25 percent terminal range.