Policy Outlook

Over the past week, market pricing for expectations of Federal Reserve (Fed) interest rate cuts has intensified. Pricing of federal funds rate futures indicates that with a rate cut in September essentially certain, the expectation for an October cut has risen to nearly 80%, pointing to policy space for 75 basis points of cuts within the year.

First Financial reporters noted that Morgan Stanley and Deutsche Bank have adjusted their respective forecasts. In reports issued on Friday, these two brokerages stated they now expect the Fed to cut rates by 25 basis points at each of the September, October, and December meetings. Previously, both institutions had forecast the Fed would cut rates by 25 basis points only in September and December.

Fed Chair Jerome Powell hinted last month at the Jackson Hole symposium that a rate cut at the September policy meeting was possible given rising risks in the labor market, but he also warned that inflation remains a significant threat.

Morgan Stanley stated that the current market environment provides the Fed with the space to adjust more quickly towards a neutral policy stance. This Wall Street brokerage anticipates the Fed could begin cutting rates by 25 basis points consecutively for four meetings starting next week (with cuts continuing until January 2026), and additionally expects further cuts in April and July 2026.

Matthew Luzzetti, Chief US Economist at Deutsche Bank, wrote: "Although our forecast does not currently include further cuts next year, as our projections for inflation and the labor market suggest rates need not fall below neutral—the risks remain skewed towards more cuts in 2026."