The question of the Fed’s key interest rate remains as relevant as ever, keeping analysts and market participants on edge. Currency strategists at Morgan Stanley have joined the discussion, firmly convinced that the Federal Reserve is unlikely to cut rates before the end of 2025. They are confident in this scenario.
Last month, the regulator kept interest rates unchanged, citing a widely recognized reason: uncertainty over the impact of US President Donald Trump’s tariffs. Against this backdrop, the Fed maintained borrowing costs in the range of 4.25% to 4.50%. The US central bank is sticking to a wait-and-see approach until there is greater clarity on the tariff effects.
Recent data has shown that American tariffs are beginning to drive up prices for goods subject to these duties, strengthening the case for keeping rates higher for longer. Morgan Stanley analysts pointed out that uncertainty remains over the extent and duration of inflation and whether price pressures driven by tariffs could spread to broader economic indicators.
Meanwhile, the US labor market is showing signs of weakness. Thus, July’s nonfarm payrolls report fell short of expectations, and figures for the previous two months were also revised lower. This has dampened initial hopes that the labor market could withstand the wave of Trump’s tariffs.
Slower job growth could serve as an argument for rate cuts, but such a scenario remains unlikely for now. According to Morgan Stanley, between rising prices and weak job growth, inflation is the more pressing problem. For this reason, unlike other Wall Street players, they do not expect the Fed to lower rates in 2025.
Nevertheless, the current tariff policy and weak US jobs report are prompting investors to believe the Fed may cut rates at its next meeting in September. Markets are now pricing in almost an 88% chance of a September cut.
