Core Insights - The latest report from Morgan Stanley reveals a split within the Federal Reserve regarding the appropriateness of a 75 basis point rate cut by 2025, with 10 out of 19 FOMC members supporting it while 9 members advocate for a smaller cut [1][6] - The division is not merely a "dove vs. hawk" scenario but stems from differing views on the level of the neutral interest rate (r*) [1][3] - Both factions agree on transitioning to a neutral rate by mid-2026 or 2027, but they disagree on what that neutral rate should be, leading to significant divergence in the dot plot [3] Labor Growth and Economic Implications - The report highlights a stagnation in U.S. labor growth, which is expected to exert downward pressure on potential economic growth (g*) and consequently on the neutral interest rate (r*) [1][5] - Historical data shows a strong correlation between neutral interest rates and potential growth rates, but since 2023, this relationship has diverged, indicating a potential decline in economic growth [5] FOMC Member Perspectives - The two factions within the FOMC are defined as follows: - Faction one consists of 10 members who believe a 75 basis point cut or more is appropriate within the year [6] - Faction two includes 9 members who argue for a cut of less than 75 basis points [6]