The Federal Reserve should be able to cut interest rates at its meeting next week. The outlook after that is a bit murky, according to Morgan Stanley. The U.S. central bank is scheduled to release its final monetary policy announcement for 2024 on Wednesday. Fed funds futures are pricing in just about a 97% likelihood of a decrease to the borrowing cost, according to CME’s FedWatch Tool. “The positive signal in November inflation data will provide ample room for the Fed to cut in December,” Michael Gapen, Morgan Stanley’s chief economist, told clients in a Friday note. “The Fed is likely to be more circumspect about what happens after that.” Gapen said the Fed was “very likely” to cut rates at next week’s meeting before recent economic data releases. After seeing unemployment edging higher in the most recent jobs report and shelter inflation easing in this week’s consumer price index reading, he said it is now a “foregone conclusion.” Looking forward, Gapen said the Fed should likely show continued optimism that inflation is on a downward trajectory. However, he predicts Fed Chair Jerome Powell will emphasize that the central bank will move “with more caution” when making future monetary policy decisions. Additionally, the path for rate cuts could shift if the Fed increases its outlook for growth and inflation while lowering expectations for the unemployment rate. While Gapen said the Fed’s dot plot should still show four rate cuts in 2025, he said it may be only one in 2026. That would result in a terminal rate of 3.1%. What’s more, the median forecast could show only three rate cuts next year. However, that would be followed by two in 2026. “A 25bp rate cut in December is baked in the cake,” he said. “The Fed will communicate more cuts are coming, but the question is when and how many.”
