Morgan Stanley has returned to an earlier prediction for a quarter-point interest rate reduction by the Federal Reserve at the central bank’s forthcoming meeting this month. The lender has abandoned its prediction for a 25-basis point reduction at the conclusion of the Fed’s December 9-10 meeting, subsequent to the release of a robust employment report for September last month. Instead, they advocated for the reduction to be implemented later in 2026. Analysts at the bank pointed to communication from Fed officials prior to the onset of a pre-meeting blackout period as a key factor influencing their decision to once again forecast a rate cut in December.

In a note on Friday, the analysts remarked, “it seems we jumped the gun,” further stating, “we should have been more patient.” It was particularly noted that New York Fed President John Williams characterized monetary policy as remaining restrictive and advocated for a rate cut in the “near term,” while both Fed Governor Christopher Waller and San Francisco Fed President Mary Daly expressed support for lower borrowing costs. Meanwhile, markets are effectively pricing in a drawdown next week, with the probability of a cut resting at approximately 87%, as indicated.

“In light of the Fed’s communication as it approaches the blackout period, the prevailing market pricing, and the historical tendency of the Fed to avoid surprising the market, we have returned to our earlier assessment,” the analysts stated. Anticipation of pushback from more hawkish members of the Federal Reserve is expected, prompting Fed Chair Jerome Powell to modify the language in the central bank’s policy statement. This adjustment aims to convey that “risk-management cuts are done” and that any subsequent cuts will be “data dependent,” according to the analysts. Predictions indicate that reductions of 25 basis points are anticipated in January and April, which would adjust the Fed’s target rate range to 3% to 3.25%.

Analysts anticipate the release of data concerning employment, spending, and pricing, which had been postponed due to an unprecedented federal government shutdown, to occur between the Federal Reserve’s meetings in December and January. The projections indicate a continued rise in unemployment, while consumer spending, a fundamental component of the American economy, has been described as “softer.” In principle, reducing rates may enhance investment, employment, and economic expansion, though it carries the potential risk of rekindling inflationary pressures.