Morgan Stanley sees Fed holding rates despite hawkish speech

Investing.com -- Morgan Stanley analysts said they expect the Federal Reserve to hold interest rates steady despite a hawkish speech from Fed Chair Kevin Warsh at Jackson Hole. The bank said inflation data will likely determine the central bank's next move.

Morgan Stanley expects core Consumer Price Index inflation to come in at 0.23% month-over-month for August and core Personal Consumption Expenditures inflation around 0.20% month-over-month. The bank said these figures would support a decision to hold rates.

The analysts noted that expected downward revisions to PCE inflation could provide an additional reason for the Fed to remain patient on rate changes.

Warsh's inflation assessment at Jackson Hole focused heavily on 12-month and 6-month breadth measures, which largely reflect the earlier acceleration in core inflation this year, according to Morgan Stanley.

The bank said the pessimistic inflation picture presented by Warsh does not appear to be shared universally within the Federal Open Market Committee.

Morgan Stanley said annual PCE revisions could lower the 12-month core PCE rate to roughly 3.1% from 3.3%. The bank expects software PCE updates to be the primary source of downward revisions to inflation in early 2026.

The analysts said Warsh's hawkish tone was likely intended to preserve optionality rather than signal an imminent rate hiking cycle.

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