Continuous Interest Rate Cuts? Deutsche Bank and Morgan Stanley Urgently Adjust Fed Rate Predictions

After the release of the Consumer Price Index (CPI) this week, all key economic indicators ahead of the Federal Reserve's interest rate meeting have been published. Against the backdrop of President Trump's tariff policies not yet fully causing prices to spiral out of control, and considering the increased volatility risks in the job market, the Federal Open Market Committee (FOMC) has shifted its policy focus toward stabilizing growth. Restarting an easing cycle is now a foregone conclusion.

On the other hand, the pace of future rate cuts has become a focal point for the market. Both Deutsche Bank and Morgan Stanley adjusted their forecasts on Friday, predicting that the Fed will cut rates by 25 basis points at each of the three remaining meetings this year.

The shift in the Fed's tone began this summer. At the end of July, two Federal Reserve governors, citing risks to the job market, argued for an immediate rate cut, becoming the first officials to hold dissenting views. Subsequently, other officials also began to downplay inflation concerns, shifting their focus more toward slowing economic growth and the risk of job losses.

As the Fed's September policy meeting approaches, the latest data shows that the unemployment rate rose to 4.3% in August, and after revisions, the U.S. economy actually lost jobs in June. In fact, if this revised data had been available during the preliminary statistics in June, it might have even influenced the Fed's interest rate decision on July 30.

Additionally, the benchmark revision of employment data released this week showed that over the year ending in March, the number of new jobs created was more than 910,000 fewer than initially reported. At the same time, the latest weekly initial jobless claims surged significantly, serving as another sign of cooling in the labor market.

This commitment may be reflected in the updated economic forecasts from policymakers—covering expectations for inflation, unemployment, and the Fed's policy rates from the end of this year to 2028. This quarterly forecast report will be released alongside the latest policy statement on Wednesday. In the current context, this report will provide the market with more clues about the future policy path. The previous quarterly forecast released in June showed that Fed officials expected two 25-basis-point rate cuts this year, but 7 out of 19 officials believed rates should remain unchanged—at the time, they were considering how Trump's tariff policies might introduce more variables into the effort to "bring inflation back to the 2% target."