Two of Wall Street's last holdouts finally concede the Fed will cut next month

Morgan Stanley and BNP Paribas, two prominent Wall Street firms, have reversed their previous stance and now anticipate the Federal Reserve will cut interest rates in September. This shift is attributed to Chair Powell's increased focus on labor market weakness over inflation concerns, particularly following the July employment report. BNP Paribas now forecasts 25bp cuts in September and December, while Morgan Stanley projects 25bp in September followed by quarterly cuts through 2026, targeting a 2.75-3.00% fed funds rate. While acknowledging potential delays from strong August economic data, Morgan Stanley warns that an earlier start to easing could lead to fewer overall cuts, summarizing this as 'the Fed cutting sooner means the Fed cutting less.'

Analysis

Two significant Wall Street holdouts, Morgan Stanley and BNP Paribas, have capitulated and now forecast a Federal Reserve interest rate cut in September, aligning with a market consensus that prices an 85% probability of such a move. This shift is primarily attributed to a perceived pivot by Fed Chair Powell, who now appears to prioritize labor market weakness over persistent inflation concerns, a change catalyzed by substantial downward revisions in the July employment report. The new forecasts differ in scope: BNP Paribas anticipates 25 basis point reductions in September and December, whereas Morgan Stanley projects a more extended easing cycle with a 25bp cut in September followed by quarterly cuts through 2026, targeting a terminal fed funds rate of 2.75-3.00%. Both firms, however, introduce critical caveats. They acknowledge that a September cut is not guaranteed and could be averted by strong upcoming inflation or jobs data. Morgan Stanley raises a key strategic concern that an earlier start to easing may result in a shorter overall cycle—summarized as “the Fed cutting sooner means the Fed cutting less”—and BNP remains cautious about tariff pass-through effects on inflation. Furthermore, the analysis points to a new dynamic of likely dissent against rate cuts from within the Fed, adding a layer of policy uncertainty.

Key Decisions for Investors

• Given the high market probability and analyst consensus for a September cut, investors should assess their portfolio's sensitivity to a dovish Fed pivot while recognizing that the move is not yet guaranteed.
• Closely monitor the upcoming August CPI and nonfarm payrolls reports, as unexpectedly strong prints represent the primary risk that could cause the Fed to hold rates and trigger market volatility.
• Consider the risk that an early cut could lead to a subsequent pause if disinflation stalls, as suggested by Morgan Stanley, warranting strategies that can perform in a stop-start easing environment.
• Factor in the potential for increased dissent within the Federal Reserve, as this could signal a less predictable policy path and higher uncertainty in the medium term.