Morgan Stanley has abruptly reversed course on its forecast that the U.S. Federal Reserve would cut interest rates by a quarter-point in December, after September’s labor market report revealed resilience that caught even hawkish strategists off guard.
The bank now points to a more cautious Fed stance, shaped by complex economic data and growing political pressure.
The Labor Department’s Bureau of Labor Statistics reported a gain of 119,000 non-farm payrolls in September, a sharp rebound from a revised 4,000-job decline in August. Economists had expected only 50,000 new jobs, having based their forecasts on earlier, less accurate data. Despite that strong hiring, the unemployment rate climbed to 4.4%, marking a four-year high.
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Morgan Stanley’s strategists said the rebound suggests that a “summertime slowdown might have been exaggerated,” pointing toward a durable labor market even as unemployment ticked up.
Morgan Stanley now projects the Fed will hold off on rate cuts until next year, estimating three reductions in January, April, and June 2026, bringing the policy rate down to 3.00–3.25%.
Trump vs. the Fed
The Fed has found itself navigating not just the data, but also mounting political heat from former President Donald Trump, who has repeatedly lambasted Chairman Jerome Powell for failing to lower rates more aggressively. Trump’s pressure campaign has become a recurring flashpoint — accusing Powell of being too cautious, too “stupid,” and even calling for his ouster.
In June, Trump publicly urged Powell to slash rates by a full percentage point. He later floated replacing him with someone who would cut faster — an unusually bold statement that rattled markets and raised alarms about the Fed’s independence. He’s even threatened legal action over the Fed’s $2.5 billion headquarters renovation, casting it as wasteful amid rate policy tension.
Trump’s persistent attacks come as he signals that any successor he endorses “will be somebody that wants to cut rates.” While he has backed off on outright removal for now — saying he doesn’t plan to fire Powell before his term ends in May 2026 — his repeated criticisms have added a layer of tension to what was once a technocratic process.
Despite Trump’s pressure, Fed officials have held firm. Powell has repeatedly emphasized that monetary policy decisions will be made “based solely on careful, objective, and non-political analysis,” and not as a reaction to political demands. That stance reflects a broader concern inside the Fed: that overreacting to political pressure now could undermine the central bank’s credibility and its ability to fight inflation down the road.
Policymakers have also pointed to other economic headwinds: wildcards like Trump’s tariffs, which could stoke inflation, and uncertainty in trade policy. Several Fed officials argue that a hasty rate cut might reignite inflation or fuel financial instability, undermining long-term macroeconomic health.
Morgan Stanley’s pivot away from a December cut underscores just how delicate the Fed’s current path has become. The bank’s strategists now view early 2026 as the more likely window for rate reductions — not because of political appeasement, but because the data and risks support a more measured approach.
This cautious recalibration comes amid a highly politicized backdrop, where the Fed must balance fulfilling its dual mandate (stable prices and high employment) with resisting overt pressure from political actors.
In short, many Wall Street analysts believe the Fed is walking a tightrope, but the stronger-than-expected jobs report may be giving it the leverage it needs to stand its ground — even as the public battle over rates intensifies.