Morgan Stanley withdrew on Thursday its forecast that the Federal Reserve would cut interest rates by 25 basis points at the December meeting, following a strong employment report for September that showed the resilience of the U.S. economy.
They added that the strong employment data indicates that the economy is stabilizing. Although the unemployment rate slightly increased, they believe it is due to a rise in labor demand and not to mass layoffs and deportations of migrant workers. The bank notes that if there is no labor participation, the unemployment rate should have decreased.
Morgan Stanley now expects the Federal Reserve to cut interest rates in January, April, and June of 2026, bringing the policy rate to a range of 3% to 3.25%. This final expectation is consistent with the previous one.
Although traders continue to bet that the Federal Reserve will skip the rate cut in December, after the Bureau of Labor Statistics publishes data on Thursday, traders slightly increased the probability that the Federal Reserve will cut rates by 25 basis points at the policy meeting from December 9 to 10 from about 20% to 33%.
Since the Federal Reserve cut rates in October, many Fed officials have been hinting at a cautious attitude regarding further reductions in borrowing costs this year as inflation remains above the 2% target. Some analysts indicate that without more compelling evidence that the labor market needs urgent support, the more cautious members of the Fed's rate-setting committee could prevail next month.
Some analysts also point out that, with the implementation next year of personal tax cuts, accelerated depreciation subsidies, and other changes in federal laws passed by the Republican-controlled Congress, the U.S. economy could strengthen next year, and this outlook could further support arguments against excessive interest rate cuts.
The minutes of the meeting on October 28 and 29 published on Wednesday show that Federal Reserve staff have already raised their outlook for next year, reflecting an expectation of stronger potential output growth and that financial conditions will provide greater support.
The minutes also indicate that this outlook also suggests: that the unemployment rate is expected to gradually decrease after this year and then stabilize at a level slightly below what the staff estimates as the natural rate of unemployment.