Morgan Stanley, Deutsche Bank expect three US interest rate cuts this year

Morgan Stanley and Deutsche Bank have revised their U.S. Federal Reserve rate cut forecasts, now anticipating 25 basis point reductions at all three remaining 2025 meetings (September, October, December). This accelerated easing expectation, driven by recent data showing more modest inflation pressures and a slowing job market, increases their previous projection of two cuts. With markets pricing a 95% chance of a 25 bps cut next week to commence the easing cycle, Morgan Stanley further projects four consecutive 25 bps cuts through January 2026, with potential for additional reductions into mid-2026, while Deutsche Bank acknowledges risks for more cuts next year.

Analysis

Major investment banks, including Morgan Stanley and Deutsche Bank, have upwardly revised their forecasts for the U.S. Federal Reserve's monetary policy, now anticipating a more aggressive easing cycle for the remainder of the year. Both firms project a 25 basis point (bps) interest rate cut at each of the three remaining 2025 meetings in September, October, and December, a significant acceleration from their prior forecast of only two cuts. This dovish shift is a direct response to recent economic data indicating moderating inflation and a cooling labor market, aligning with Fed Chair Jerome Powell's recent acknowledgment of rising labor market risks. Market pricing reflects high conviction in this outlook, with the CME FedWatch Tool indicating a 95% probability of a 25 bps cut at the September meeting. Looking further ahead, Morgan Stanley models four consecutive 25 bps cuts through January 2026, while Deutsche Bank notes risks are skewed towards additional reductions next year, suggesting a sustained easing trajectory. The consensus contrasts with Standard Chartered's outlier call for a more aggressive 50 bps cut, highlighting that while the direction is clear, the exact pace of easing remains a key variable.

Key Decisions for Investors

• Investors should consider increasing exposure to duration-sensitive assets, such as long-term government bonds and growth stocks, as the consensus forecast for an accelerated Fed easing cycle implies a lower-for-longer rate environment.
• Closely monitor upcoming inflation and employment data, as the revised analyst forecasts are highly data-dependent and any unexpected strength could lead to a rapid repricing of rate-cut expectations and introduce market volatility.
• Evaluate portfolio positioning for potential sector rotation into areas that typically benefit from falling interest rates, such as technology, consumer discretionary, and REITs, while potentially reducing exposure to sectors that may face margin pressure.
• While the 25 bps cut is priced in, investors should maintain a tactical awareness of the outlier 50 bps scenario, as any shift in consensus towards this more aggressive cut would significantly impact asset prices.