Morgan Stanley Projects Fed Will Hold Rates, Citing Inflation Outlook

Morgan Stanley analysts predict the Federal Reserve will hold interest rates steady at its next meeting, despite a hawkish speech from Fed Chair Kevin Warsh at the recent Jackson Hole economic symposium. The bank's assessment hinges on the belief that forthcoming inflation data will be moderate enough to justify a pause.

Inflation Data Seen as Decisive

According to Morgan Stanley, the central bank's next move will be determined by key inflation reports. The firm projects that core Consumer Price Index (CPI) inflation for August will register a 0.23% month-over-month increase, while core Personal Consumption Expenditures (PCE) inflation—the Fed's preferred gauge—is expected to be around 0.20% month-over-month.

In the bank's view, these figures would support a decision to keep rates on hold. Analysts also noted that anticipated downward revisions to annual PCE data could provide an additional reason for the Fed to remain patient. These revisions, primarily driven by updates to software PCE, could lower the 12-month core PCE rate to approximately 3.1% from its current 3.3%.

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Interpreting Hawkish Rhetoric

Morgan Stanley suggested that Chair Warsh's firm tone on inflation at Jackson Hole does not necessarily signal an imminent rate hike. The analysts pointed out that Warsh's assessment focused on 6- and 12-month inflation measures, which largely reflect the acceleration in prices seen earlier this year.

The bank also noted that the pessimistic inflation picture presented by the Fed chair does not appear to be universally shared within the Federal Open Market Committee (FOMC). Instead, Morgan Stanley interprets the hawkish language as a strategic move to "preserve optionality" for future policy decisions rather than a definitive signal of a new tightening cycle.