Quick Takeaways:
- Morgan Stanley now sees December as a strong candidate for the first Fed rate cut.
- Powell will highlight data dependence instead of signaling fast easing.
- Further cuts could follow in January and April if conditions weaken.
The Rising Popularity of December
Morgan Stanley anticipates that the Federal Reserve could initiate easing measures in December. This change is occurring as indications, from both policymakers and markets, start to converge.
Officials appear receptive to rate cuts despite ongoing disagreement. Traders have also reduced their anticipation of inflation surprises, allowing space for a careful initial move.
Fed Chair Jerome Powell is expected to avoid bold promises. He will likely emphasize data dependence and resist pressure for rapid easing. Still, the bank argues that December now holds real weight, not just symbolic value.
Data Trends Are Driving the Shift
Morgan Stanley says the timing reflects practical considerations. By late January, the Fed will have more complete data on hiring, spending, and inflation for the final quarter.
A December cut would allow the central bank to ease financial conditions without sending a strong signal of victory over inflation.
The bank expects follow-up cuts in January and April, but only if price growth continues to cool. Any surprise in employment or consumer demand could delay that path.
Holiday Spending Provides Mixed Signals
Consumer spending trends play a key role in the bank’s view. Early holiday data shows strength, but Morgan Stanley warns against reading too much into Black Friday numbers.
Early-season spending has rarely predicted full-quarter results with accuracy.
The bank also noted a key detail: much of the spending growth came from higher prices, not higher volume. That suggests consumers may be more cautious than headlines suggest.
If demand softens through December, the Fed could see more justification for easing.
What This Means for the Market
Morgan Stanley does not see a sudden dovish pivot. Instead, it sees a measured path shaped by real-time data.
A reduction in December would serve as an initial move, rather than a celebration. It would provide the Fed with adaptability should the economy slow down more quickly than anticipated in early 2026.
The story focuses on tempo, not haste. The U.S. Economy appears sturdy externally, yet underlying signs suggest a deceleration in growth. This creates an environment where the Fed may prefer gradual easing to prevent a sharper downturn.