Episode summary
One Fed Hike—Or More to Come?
Thoughts on the Market (Morgan Stanley)
· · 12 min · Hosts: Matthew Hornbach, Michael Gapen
Summary
The guest says the Fed’s 25 basis point rate hike was expected, but it highlights a bigger problem: inflation is not slowing fast enough, and much of what remains looks supply-side driven rather than something higher rates can easily fix. In that view, tighter policy may still matter by slowing the parts of the economy that are most interest-rate sensitive, but it is not a clean answer to tariffs, energy, supply-chain effects, or AI-related price pressures.
On the policy path, the guest argues this should not be viewed as a one-and-done hike. Because monetary policy works with a lag, the Fed would likely think in terms of a series of moves, even if incoming data or revisions later make the cycle end sooner than expected. He also says revisions to PCE inflation could lower the year-on-year rate by about a tenth or more and help create a slower-moving hiking path.
The host says the rates market is focusing less on the underlying inflation trend and more on energy prices, especially Brent crude, WTI crude, and gasoline. He says energy spikes push markets toward a more hawkish Fed path, while falling energy prices do the opposite. He also argues the size of the U.S. debt stock matters less than how quickly it grows, noting that the 10-year Treasury yield was roughly unchanged even as debt rose from $31 trillion to $40 trillion.
Key takeaways
- The guest says the Fed’s 25 basis point hike was in line with expectations but does not solve inflation that is still too persistent.
- The guest believes the Fed is likely thinking in terms of more than one hike because policy works with a lag.
- The guest says PCE methodology revisions could trim year-on-year inflation by about a tenth or more and may support a slower hiking cycle.
- The host says energy prices are the main driver of how markets reprice the Fed’s path, with oil and gasoline swings moving Treasury yields.
- The host argues that the pace of debt growth matters more than the absolute debt level for Treasury yields.
Notable quotes
“I strongly believe the committee as a whole is thinking in terms of more than one move”
“Monetary policy doesn't say hyperreact. It reacts with a bit of a delay”
“the majority of the inflation we're seeing is supply side driven from tariffs uh from energy”
“the primary driver of how the markets are pricing the future of Fed policy is in fact uh the changes in the price of of energy commodities”
“it's not the level of the debt, the amount of debt in in in the economy that matters most for the level of interest rates”
How the episode opens
Welcome to Thoughts on the Market. I'm Matthew Hornbach, global head of macro strategy at Morgan Stanley.
And I'm Michael Gapen, Morgan Stanley's chief US economist. Today, what the Federal Reserve decided at its September meeting and what it could mean for rates through the end of the year. It's Wednesday, September 16th at 400 p.m.
in New York. So, Mike, the Fed raised rates by 25 basis points at this week's meeting. What stood out to you the most in the decision?
And when it comes to inflation, how do you think this 25 basis point rate hike is actually going to affect the inflation outlook?
Yeah. So certainly the decision was in line with expectations. You know, obviously what we've learned in the very broad sense is that inflation isn't moving fast enough in the direction that that the Fed wants.
So it's responding by tighter monetary policy and that does set up a very interesting question which you just asked which is well is it going to work? Is this the right response to the inflation that we're seeing? So, if you do go back and reread that Jackson Hole speech, there's not a lot in there about the drivers of inflation, what's causing higher inflation, but it's clear the only response to above target inflation from the point of view of the chair was tighter monetary policy.
So, the Fed is in a a bit of a pickle. Most of us believe the majority of the inflation we're seeing is supply side driven from tariffs uh from energy at least in the past let's call it supply chain disruptions a deglobalization narrative some of it is demand side driven through AI but I think we we're all looking at that thinking modestly tighter rates isn't necessarily going to uh bring down that AI related inflation so we're left to conclude that the Fed's in this uncomfortable position of saying well a lot of the inflation that we're seeing is supply side driven and from the structural AI story that we're not convinced higher rates can maybe address.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rate hike
- inflation outlook
- interest rates
- energy prices
- market expectations
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Watch “One Fed Hike—Or More to Come?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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