Following a disappointing July jobs report, investor expectations for a Federal Reserve rate cut in September surged. But leading economists at Morgan Stanley and Bank of America are urging caution, pointing to key economic indicators that suggest the Fed may not be ready to shift course.
According to the CME FedWatch Tool, markets are now pricing in an 87.8% probability of a 25-basis-point cut at the Fed’s September meeting—up sharply from just 37.6% at the end of July. The move reflects a significant sentiment shift after the U.S. economy added only 73,000 jobs in July, well below consensus estimates. Adding to investor concern, the Bureau of Labor Statistics revised down job gains for May and June by a combined 258,000, bringing the three-month average to just 35,000—levels often associated with an economic downturn.
That weakness in the labor market triggered a strong reaction across financial markets. Equities sold off on the news, and some market commentators, like Jamie Cox, managing partner at Harris Financial Group, argued that the Fed may even opt for a 50-basis-point cut to compensate for delayed action. “Powell is going to regret holding rates steady this week,” Cox said in an August 1 note. “September is a lock for a rate cut.”
But not everyone is on-board with that outlook.
Morgan Stanley: Not Enough Evidence to Cut
Michael Gapen, chief U.S. economist at Morgan Stanley, remains skeptical that the Fed will ease policy in the near term. In an August 1 note, Gapen said the broader labor market still appears healthy despite the weak headline payroll number. Unemployment remains at a historically low 4.2%, which indicates that the labor market is still in balance—even as job creation slows.
“Powell himself acknowledged that the demand for workers is cooling, but so is the supply. So it’s a balanced market,” Gapen wrote. “Yes, payrolls were softer than expected and revisions were negative, but the unemployment rate has held steady for the past year. That doesn’t support a near-term cut.”
Gapen emphasized that the Fed is still contending with inflation that’s well above its 2% target. Powell maintained a hawkish tone during his July 30 FOMC press conference, reiterating that bringing inflation back down remains the top priority. From Gapen’s perspective, the Fed is more likely to hold steady into 2026 unless inflation shows more convincing progress toward its target.
Bank of America: Inflation Still the Bigger Threat
Aditya Bhave, senior economist at Bank of America, is equally cautious. In a note published the same day, Bhave confirmed BofA’s call that the Fed is unlikely to cut rates in 2025—let alone this year.
“The Fed is still missing by a lot more on inflation than its labor mandate,” Bhave wrote. “Cutting rates in September would require the Fed to bet on further deterioration in the labor market, without solid evidence that inflation has peaked.”
One of BofA’s concerns is that tariff-related uncertainty and potential policy changes could lead to an inflation resurgence. Bhave also cited internal consumer spending data from BofA clients in July, which showed signs of economic resilience—not weakness. Spending accelerated across debit and credit cards, Amazon’s Prime Day saw record activity, and both auto sales and air travel posted strong gains.
“The risk of cutting too soon is that the Fed stimulates demand just as the economy is rebounding,” Bhave said. “July’s consumer strength supports the view that trade policy uncertainty may be easing and the economy is regaining momentum.”
Implications for Wealth Advisors
For advisors evaluating fixed income strategies or reallocating client portfolios based on rate expectations, these diverging views present a challenge. Market sentiment has shifted sharply toward rate cuts, but institutional economists with deep Fed-watching credentials are still leaning toward a higher-for-longer scenario.
If Gapen and Bhave are right, portfolios positioned too aggressively for rate relief could underperform—especially in duration-sensitive asset classes. Advisors may want to revisit their assumptions around interest rate risk, inflation resilience, and the timing of any potential policy pivot.
While the labor market data raised red flags, it has not yet confirmed a full-fledged recession. And as both economists point out, the Fed is still operating in an environment where inflationary pressures have not fully dissipated. Until there’s more clarity on both fronts, caution may be the prudent path forward.
Wealth managers should stay nimble. Monitor labor market trends closely, but don’t lose sight of the inflation picture. And be prepared to reassess allocations if consumer strength continues to show up in spending data.
In short: Markets are leaning into the rate-cut narrative—but the data may not support that story just yet.
