Investors see 25bps cut on Wednesday, Morgan Stanley’s survey shows

Morgan Stanley said in a note Tuesday that its recent survey results show that the majority of investors expect the Federal Reserve to announce a 25 basis point (bps) interest rate cut during the September Federal Open Market Committee (FOMC) meeting.

This sentiment was gathered in the firm’s monthly Business Conditions Index (MSBCI) survey, conducted from September 9-11.

The survey polled company management teams across various sectors, including oil and gas services, financials, life insurance, and technology hardware, with most respondents predicting a 25bp cut.

According to Morgan Stanley, “The majority of respondents expect a 25bp rate cut at the September FOMC meeting.” This sentiment is said to be shared across multiple industries, including mid-cap financials, telecommunications, chemicals, and property and casualty insurance.

Meanwhile, the bank says a smaller number of respondents from sectors like hardline retail and large-cap financials anticipate a 50bps reduction.

Since the survey concluded, market expectations for a 50bps cut have risen, with the probability now around 65%, up from approximately 30% earlier.

Despite this shift, Morgan Stanley remains aligned with the majority view, stating: “We expect the Federal Reserve to move ahead with its first 25bp cut at the September meeting.”

In addition to the rate cut, Morgan Stanley expects the FOMC statement to acknowledge progress in taming inflation and recognize growing risks in the labor market.

However, the firm predicts that Fed Chair Jerome Powell will avoid committing to specific future rate cuts, emphasizing the Fed’s data-dependent approach.

The upcoming meeting is also likely to include updates to the Fed’s Summary of Economic Projections (SEP), with expected upward revisions to unemployment and downward revisions to core PCE inflation in 2024. The median dot is projected to shift from indicating one to three cuts this year, according to Morgan Stanley.