Morgan Stanley predicts the U.S. Federal Reserve may cut rates more sharply than expected, with scenarios showing a lower path for the fed funds rate. Chair Jerome Powell’s speech at Jackson Hole indicated a more accommodative stance, leading to potential rate cuts in 2025-2026. The bank recommends owning long positions in various instruments based on these projections.

The three scenarios analyzed by Morgan Stanley suggest a more bullish outlook for Treasurys. Traders could assign higher probabilities to dovish outcomes due to recession risks or the Fed’s approach to inflation, potentially leading to fed funds rates dropping 100bp lower than the assumed terminal rate of 3.25%. Bond markets currently only price in a 20% chance of this scenario, despite growing labor market risks.

Read more at Yahoo Finance: This Wall Street heavyweight predicts interest rates could go even lower than markets think