Morgan Stanley Reverses Course, Drops December Fed Rate Cut Forecast Amid Resilient Economy

November 20, 2025 at 12:54 PM EST

New York, NY – November 20, 2025 – Morgan Stanley (NYSE: MS) has once again recalibrated its outlook for Federal Reserve monetary policy, notably abandoning its forecast for a December 2025 interest rate cut. This significant revision, communicated today, reflects a shifting economic landscape marked by unexpectedly strong employment data and the Federal Reserve's continued cautious stance on inflation. The investment bank now projects the initial rate cut to occur in January 2026, followed by reductions in April and June of next year.

This latest revision underscores the dynamic and often unpredictable nature of economic indicators and central bank policy, signaling a more prolonged period of elevated interest rates than previously expected, creating a "higher-for-longer" environment.

Detailed Coverage of the Event

Morgan Stanley officially dropped its forecast for a December Federal Reserve rate cut on November 20, 2025, citing stronger-than-anticipated employment data. This revision marked a significant shift from the investment bank's earlier predictions for the end of the year. The primary catalyst was robust employment data, particularly a "sharp and broad rebound in payrolls (+119k)" in September, which saw an increase of 119,000 jobs, significantly above the consensus forecast of 50,000. While the unemployment rate ticked up slightly to 4.4% from 4.3%, Morgan Stanley attributed this to higher labor force participation rather than an increase in layoffs. The three-month average of job gains also reaccelerated to +62,000 from +18,000, despite small downward revisions to prior months.

The timeline of Morgan Stanley's forecast for Federal Reserve rate cuts throughout 2025 has been fluid. Earlier in 2025, analysts, led by Michael Gapen, Chief U.S. Economist at Morgan Stanley, had anticipated the Federal Reserve would leave rates unchanged. However, around August 25-26, 2025, following a changed tone from Federal Reserve Chairman Jerome Powell at the Jackson Hole symposium, Morgan Stanley began to expect two cuts in 2025, in September and December. By September 2025, they further revised, predicting four consecutive 25-basis-point cuts starting with September and continuing through January 2026, which included the now-abandoned December 2025 cut. Ahead of the November 20 decision, Gapen noted that delayed jobs data for October and November would reduce the chances of a December cut.

Key players involved include Morgan Stanley (NYSE: MS) analysts, particularly Michael Gapen, whose commentary has guided these revisions. Federal Reserve officials, especially Chairman Jerome Powell, whose statements and the minutes from the late October FOMC meeting revealing deep divisions among policymakers, also played a crucial role. The September 2025 jobs report was the direct trigger. Initial market reactions saw a significant diminishment of expectations for a December 2025 Fed rate cut, with odds falling from nearly 95% a month prior to 50-50 by November 19, 2025. Gold and silver prices saw a downturn as well, indicating that while Morgan Stanley's update confirmed a trend, the market was already adjusting.

Companies That Might Win or Lose

Morgan Stanley's revised outlook, suggesting a more prolonged period of elevated interest rates into early 2026, will distinctly affect various sectors and specific public companies. The Federal Reserve did implement two 25-basis-point rate cuts in September and October 2025, bringing the federal funds rate to a target range of 3.75%-4.00%, but the delay in further anticipated cuts signals persistent inflation concerns and robust economic activity.

Potential Winners:

Large, well-capitalized banks often benefit from a prolonged period of higher interest rates due to wider net interest margins (NIM). Banks like Mitsubishi UFJ Financial Group (NYSE: MUFG) are poised to gain.
Large, established technology companies with strong balance sheets, such as Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Alphabet (NASDAQ: GOOGL), are less reliant on external debt and can navigate higher borrowing costs. Companies focused on essential enterprise software, cloud infrastructure, or AI infrastructure like Nvidia (NASDAQ: NVDA) are also likely to see continued investment.
Established utility companies with predictable cash flows, like Enbridge Inc. (NYSE: ENB), are often seen as defensive investments, attractive during economic uncertainty due to stable revenue streams and dividend payouts.
Discount retailers may see increased demand as consumers tighten their belts due to higher borrowing costs.

Potential Losers:

Growth-oriented tech startups and highly leveraged companies that depend heavily on venture capital funding or debt will find borrowing more expensive, hindering their ability to innovate and scale.
Residential real estate developers and homebuilders will face reduced housing affordability due to higher mortgage rates, dampening buyer demand. Companies like Builders FirstSource (NASDAQ: BLDR) and Mohawk Industries (NYSE: MHK) could see less upside.
Commercial real estate (CRE) developers and REITs such as Prologis Inc. (NYSE: PLG) face increased borrowing costs for new developments and refinancing, potentially leading to project delays and reduced property values.
Companies selling non-essential goods and services in the consumer discretionary sector will likely see reduced spending as disposable income decreases.
Capital-intensive utility companies will face higher borrowing costs for infrastructure projects, impacting profitability.
Banks with high exposure to risky loans or smaller regional banks facing intense competition for deposits might struggle with compressed NIMs or increased defaults.

Wider Significance

Morgan Stanley's decision to drop its December 2025 Federal Reserve rate cut forecast reflects a broader industry trend of adjusting expectations towards a more cautious and delayed easing cycle. This aligns with sentiments from other major financial institutions like Goldman Sachs (NYSE: GS), which also abandoned earlier expectations for January 2025 cuts, and J.P. Morgan Global Research (NYSE: JPM), which had predicted fewer cuts for 2026. The general sentiment among forecasters, including the Federal Reserve Bank of Philadelphia's survey, is for moderate real GDP growth and a stable unemployment rate in the coming years, suggesting the economy can withstand higher rates for longer.

This shift underscores the Federal Reserve's commitment to its dual mandate of maximizing employment and maintaining stable prices, with a current strong emphasis on bringing inflation, still above the 2% target (September CPI at 3%, PCE around 2.8%), under control. Atlanta Fed President Raphael Bostic stated in November 2025 that price stability remains the more urgent priority. While the labor market shows resilience, the Fed's late October meeting minutes revealed deep divisions among policymakers, with some favoring holding steady due to inflation concerns and others pushing for larger cuts due to perceived labor market fragility.

The ripple effects are broad. For investment banks and asset managers, it means continued recalibration of models and client advice. For corporations, prolonged higher borrowing costs could dampen investment and pressure profit margins, particularly for highly leveraged firms. Consumers will continue to face elevated mortgage, car, and credit card rates, impacting spending. In global markets, equity markets may see continued volatility and sector rotations, with a stronger US dollar potentially impacting international trade. Fixed income markets could see elevated Treasury yields.

Regulatory and policy implications center on the Fed's independence and its balancing act between inflation and employment. A delayed cut prioritizes price stability. Political factors, such as the policies of an incoming administration (e.g., potential tariffs from a Donald Trump administration, which have been cited as a factor that could push prices up), could further complicate the Fed's efforts. Historically, shifts in Fed policy often lead to market volatility, but the S&P 500 has shown robust performance in the 12-24 months following initial rate reductions in "soft landing" scenarios. However, if cuts are reactive to a recession, market downturns can be significant.

What Comes Next

Morgan Stanley now projects the Federal Reserve will initiate rate cuts in January, April, and June of 2026, maintaining a terminal rate projection of 3-3.25%. This implies a more gradual easing cycle. The economy faces continued uncertainty in the short term, with sticky inflation and a resilient but cooling labor market. Long-term, the Fed's own projections suggest a slow, measured path toward lower rates through 2027.

For businesses, strategic pivots will involve evaluating financing options for 2026, focusing on operational efficiency, strengthening customer focus, and considering strategic M&A opportunities. Investing in digital infrastructure and emerging technologies is also crucial. For investors, portfolio reallocation away from high cash allocations into targeted bonds (short-to-intermediate maturities) and quality equities (large-cap stocks) is advised. Diversification with alternative strategies, hedging with gold and potentially Bitcoin, and careful risk management are paramount.

Market opportunities include reduced borrowing costs in 2026 stimulating business investment and strategic growth for strong companies. Challenges include sustained volatility, persistent inflationary pressures requiring the Fed to keep rates higher, potential labor market weakness dampening consumer spending, and financial stability risks if overly accommodative policies lead to excessive risk-taking. Geopolitical tensions and aggressive tariff policies also add complexity.

Potential scenarios for future Fed policy include a Delayed but Gradual Easing (Morgan Stanley's baseline), leading to a "soft landing" with good performance for the S&P 500 and U.S. high-yield bonds. An "Insurance Cuts" with Persistent Inflation scenario could see the Fed preempting downturns while inflation hovers above target, risking financial instability. A Deeper Economic Slowdown/Recession would likely lead to more aggressive Fed cuts, with U.S. Treasuries and gold outperforming. Finally, a Hawkish Reversal due to Stubborn Inflation could see the Fed halt cuts or even hike rates, stifling growth.

Comprehensive Wrap-up

Morgan Stanley's decision to drop its December 2025 Fed rate cut forecast is a pivotal moment, reflecting a broader consensus among financial institutions that the "higher-for-longer" interest rate environment will extend into early 2026. This shift is a direct consequence of a surprisingly resilient labor market, which provides the Federal Reserve ample justification to prioritize its inflation-fighting mandate without immediately risking a significant economic downturn.

Moving forward, the market is likely to experience continued volatility as investors digest the implications of a more gradual easing cycle. While some sectors, like large banks and established tech giants, may weather this period well, interest-rate-sensitive sectors such as real estate and highly leveraged growth companies could face ongoing headwinds. The S&P 500, despite potential short-term bumps, is still viewed optimistically by Morgan Stanley for 2026, driven by strong earnings and AI adoption. The U.S. dollar is expected to have a "choppy year," influenced by labor market concerns and Fed policy.

The lasting impact of this decision underscores the profound uncertainty in economic forecasting and the Fed's data-dependent approach. It reinforces the idea that the central bank will not rush to cut rates until there is clear, sustained evidence of disinflation and/or a more significant weakening in the labor market. Investors must prepare for a landscape where borrowing costs remain elevated for longer, requiring careful portfolio management and strategic adaptations.

In the coming months, investors should vigilantly watch for key economic data: inflation reports (CPI, PCE), labor market statistics (payroll figures, unemployment, wage growth), and Federal Reserve communications. Economic growth data and geopolitical developments will also be crucial. Corporate earnings will be vital for equity investors, as strong fundamentals could help mitigate the impact of delayed rate cuts. This period demands a nimble and informed approach to investment, with a focus on quality, diversification, and a deep understanding of the evolving macroeconomic picture.

This content is intended for informational purposes only and is not financial advice