The firm had revised their call to expected two rate cuts by the Fed this year at the end of August here. And they reaffirm that call in expecting the Fed to cut rates in September but warns that it is not a shoo-in.

Morgan Stanley notes that a stronger payrolls number (~225k in August) or a sharp tariffs-driven inflation uptick could put off the Fed from hiking rates this month. Adding that the internal debate at the Fed is also a hurdle, with dissents a probability as some policymakers might feel that the central bank is hurried into cutting too soon.

But on the flip side, a sizeable drop in payrolls could force the Fed’s hand to act sooner amid a larger front-loading of rate cuts pricing by markets as well. That being said, they still retain the view that the Fed will continue on a more dovish path heading into next year. The firm still assumes quarterly rate cuts by the Fed through 2026 to a terminal rate of 2.75% to 3.00%.