Jackson Hole Reaction: Morgan Stanley's Analysis on Fed Rate Hikes & Policy Outlook

Fed Chair Warsh delivered a hawkish Jackson Hole speech emphasizing interest rates as the primary tool to achieve the 2% PCE target, but Morgan Stanley maintains its baseline that the Fed will remain on hold as inflation continues to cool. The report recommends tactical trades including September-October FOMC OIS flatteners, long AUD/USD, short agency MBS basis, and long CLO AAAs.

Key Takeaways

• 1.Chair Warsh delivered a hawkish Jackson Hole speech framing interest rate hikes as the primary policy tool to control inflation, but Morgan Stanley views this as preserving optionality rather than explicit forward guidance.
• 2.Morgan Stanley maintains its baseline view that the Fed will remain on hold in 2026 as incoming August CPI and disinflation trends keep policy steady; if hikes occur, they are likely to total a 'leisurely' 50-75bp rather than an aggressive hiking cycle.
• 3.Rates strategists recommend exiting UST 7s30s and SFRM7M8 steepeners, and entering September-October FOMC OIS flatteners at +8bp to benefit from an on-hold Fed while hedging against a potential hike.

Table of Contents

• Key Takeaways
• US Economics: The Hike Not Taken
• Two roads diverged in a yellow wood
• The speech clearly leaned hawkish and argues for rate hikes
• Interest rates are the primary tool of policy
• 2% PCE inflation remains the target
• The economy today: Activity and labor markets are not the problem, inflation is
• We are not yet convinced: We maintain our view of a Fed-on-hold
• The Fed will stay hold in September for the same reason it did in June and July
• The desired progress on inflation progress is coming
• The hike not taken
• Global Macro Strategy
• US Rates Outlook
• Are markets the 20th FOMC participant?
• The newest measure of underlying inflation?
• US Dollar Outlook
• Securitized Products — Hawkish Hole, Bearish Basis
• Agency MBS Outlook
• Securitized Credit Outlook
• Valuation Methodology and Risks
• Disclosure Section

Report data

Exhibit 4: FOMC OIS curve: October 2026 vs. September 2026 over the last year

Reports in this series

Federal Reserve Monitor is shown in chronological order through this edition, published on August 28, 2026.

Part of the Federal Reserve Monitor series — view all 4 editions

Looking for the latest edition? MS Jackson Hole Reaction The Hike Not Taken(1) (Aug 31, 2026)

1. Aug 23MS Jackson Hole Preview If you want to say less, say less
2. Aug 27MS Upward revisions to core PCE inflation means the Fed has less margin for error

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