Morgan Stanley predicts that Miran will be a voting member but likely the only one pushing for a 50 basis point rate cut. The firm expects a 25 basis point cut instead, with indications that the dot plots will show two cuts each for 2025 and 2026. They highlight past trends where the Federal Reserve has opted for gradual easing when its policy has been somewhat restrictive. Currently, there’s not enough evidence of a labor market collapse to warrant drastic actions.

Upcoming Speech

As for Fed Chair Powell’s upcoming speech, Morgan Stanley expects him to have a tone like he did at the Jackson Hole meeting. Powell is likely to mention the risks to the labor market while stressing a data-driven approach. Despite their cautious view, Morgan Stanley believes the Federal Reserve will start making consecutive rate cuts, beginning with an announcement today and continuing through January next year. We are anticipating a 25 basis point rate cut from the Fed tomorrow, marking a move towards gradual easing. The market has mostly anticipated this, so the immediate change isn’t the main highlight. A solitary push for a sharper 50 basis point cut will likely be seen as a dissenting opinion rather than a guiding principle. This careful approach aligns with the Fed’s actions in 2019, when they began reducing rates by 25 basis points after a period of tighter policy. Current labor market data backs this cautious strategy; the latest report from August showed job growth slowing to 165,000, with unemployment steady at 4.1%. This indicates a softening labor market but not a collapse, allowing the Fed to act thoughtfully rather than react hastily.

Market Expectations

For derivative traders, the key market-moving insights will come from the forward guidance in the dot plot and Chair Powell’s press conference. With a strong likelihood of a 25 basis point cut, short-term volatility may be costly and offer little benefit. The focus should be on how the projections for two cuts in 2025 and two in 2026 are communicated. The expectation is for a series of cuts through January 2026, paving the way for lower short-term rates. This suggests that getting involved in interest rate futures, like the December 2025 and March 2026 SOFR contracts, could be beneficial to take advantage of this easing cycle. Any shift toward a hawkish tone in Powell’s remarks would serve as a notable counter-signal. The main risks lie in surprises surrounding the expected 25 basis point move. If rates are held steady, short-term yields could spike sharply. Conversely, an unanticipated 50 basis point cut would indicate deeper economic concerns and could boost bond prices. Using out-of-the-money options to hedge against these unexpected outcomes could be a wise strategy leading up to the announcement. Create your live VT Markets account and start trading now.

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