Federal Reserve Monitor

Latest edition · August 31, 2026

MS Jackson Hole Reaction The Hike Not Taken(1)

Chair Warsh delivered a hawkish Jackson Hole address highlighting inflation as the primary economic problem and interest rates as the main corrective tool. Morgan Stanley maintains its baseline that the Fed will stay on hold this year due to incoming disinflation, recommending tactical hedges such as Sep-Oct FOMC OIS flatteners and an underweight stance on agency MBS.

Federal Reserve Chair Warsh used his Jackson Hole address to set a hawkish tone, reaffirming a strict 2% PCE inflation target, noting that financial conditions are not restrictive, and metaphorically framing policy options between an aggressive 'Don Kohn' hike and a leisurely 'Ben Bernanke' hike. Markets responded by pricing a 58% probability of a 25bp hike in September and 44bp of tightening by year-end. Morgan Stanley economics maintains that the Fed will remain on hold, supported by an anticipated drop in core August CPI (0.22% m/m) and declining 6-month annualized core PCE. Strategists advise entering Sep-Oct FOMC OIS flatteners, exiting UST 7s30s steepeners, shorting conventional 5.5 MBS basis, and positioning for USD weakness versus AUD.

Key takeaways from the latest edition

• 1.Chair Warsh's Jackson Hole speech leaned hawkish, emphasizing that interest rates are the primary tool to tackle above-target inflation, but Morgan Stanley maintains that the Fed will remain on hold this year.
• 2.Disinflation progress is expected in the August CPI and upcoming core PCE data, which Morgan Stanley projects will be sufficient to convince the FOMC majority to stay on hold in September.
• 3.Rates strategists advise exiting UST 7s30s and SOFR M7M8 steepeners, while entering Sep-Oct FOMC OIS curve flatteners at +8bp to monetize hold expectations and hedge against a potential September rate hike.

What this series covers

• 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

Edition archive

• MS Jackson Hole Reaction The Hike Not Taken(1)

  August 31, 2026

• MS Jackson Hole Reaction The Hike Not Taken

  August 28, 2026

• MS Upward revisions to core PCE inflation means the Fed has less margin for error

  August 27, 2026

• MS Jackson Hole Preview If you want to say less, say less

  August 23, 2026