Strong Jobs Report Spurs Forecast Shift
Morgan Stanley, the global investment bank with roughly $1.3 trillion in assets under management, has revised its outlook for U.S. monetary policy. The firm now no longer expects the Federal Reserve to cut interest rates in December 2025, citing surprisingly robust labour-market data.
In its latest note, Morgan Stanley pointed to the official September payrolls figure 119,000 jobs added, well above consensus expectations as key evidence that the summer-slowdown narrative may have been overstated. Although the unemployment rate ticked up to 4.4 %, the firm interpreted the rise as largely a reflection of higher labour-force participation rather than job loss.
What’s Changed in the Forecast?
Previously, Morgan Stanley had pencilled in a rate cut by the Fed in December. However, the latest labour-market strength means that the bank’s economists now expect the first easing move in January 2026, followed by additional cuts in April and June 2026, bringing the terminal federal-funds rate down to approximately 3.00-3.25%.
Morgan Stanley’s revised timeline reflects a more gradual path of monetary loosening than markets had assumed, and signals that the Fed may remain on hold for longer into year-end.
Implications for Markets and Investors
The shift has several important implications:
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Risk-assets reaction: With fewer near-term rate cuts, bond yields may trade higher, and rate-sensitive equities could face headwinds.
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Policy stance clarity: The Fed’s “pause and assess” posture appears reinforced, with the labour-market strength reducing urgency to ease policy.
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Investor positioning: Those expecting December easing may need to recalibrate duration, leverage and asset-allocation assumptions.
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Communication dynamics: This change may also influence how Fed watchers interpret forward guidance and the Fed’s reaction to future data releases.
Why Morgan Stanley is More Cautious
Morgan Stanley cited the following reasons for its revision:
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Broad-based job gains: The gains spanned both goods and services sectors, suggesting the economy remains resilient.
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Higher labour-force participation: The rise in unemployment was offset by more people entering the job market, underscoring underlying strength.
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Inflation and policy risks: A resilient job market may keep inflation pressures alive, reducing the case for a near-term rate cut.
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Delayed normalisation path: The firm believes that rather than a rapid easing cycle, the Fed will adopt a simpler, slower path of cuts starting next year.
What to Watch Ahead
Investors and policymakers should monitor:
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Monthly labour-market releases (non-farm payrolls, unemployment rate)
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Fed communication and dot-plot updates
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Inflation measures such as the PCE (Personal Consumption Expenditures) index
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Market expectations (futures pricing) for rate-cut timing
FAQs
Q1: Why did Morgan Stanley abandon its December rate-cut forecast?
A1: Because of stronger-than-expected U.S. job creation in September (119,000 jobs added) and signs that the labour market remains resilient, reducing immediate pressure on the Fed to ease policy.
Q2: When does Morgan Stanley now expect the Federal Reserve to cut rates?
A2: The firm now expects the first cut in January 2026, followed by further cuts in April and June 2026, targeting a terminal rate of about 3.00-3.25%.
Q3: How does this forecast revision affect the markets?
A3: A later-than-anticipated rate cut may push bond yields higher, affect duration-sensitive assets, dent equity valuations in some sectors and require investors to adopt more defensive stances.
Q4: Does this mean the Fed has changed policy direction?
A4: Not necessarily; this reflects a changed outlook based on data, not a new policy mandate. The Fed still retains flexibility, but near-term easing appears less likely.
Q5: What are the key risks that could alter this forecast again?
A5: A sharp downturn in the labour market, a spike in inflation, or a global economic shock could prompt a sudden policy shift and reinstate December cut expectations.
Q6: How should investors adjust their strategy in light of this?
A6: Investors may want to re-evaluate asset allocations that assumed early policy easing, review duration positioning in fixed income, focus on sectors less dependent on high yield or leverage and be cautious of overly optimistic rate-cut timing.