Episode summary
To Hike or Not to Hike
Thoughts on the Market (Morgan Stanley)
· · 11 min · Hosts: Matthew Hornbach, Michael Gapen
Summary
The discussion centers on how the Fed can avoid hiking rates at the current meeting while still signaling that more tightening is likely ahead. The guest argues the message can be framed as a measured recalibration: the Fed already began removing accommodation, inflation remains sticky, but the labor market is not clearly overheating. In that reading, the committee does not need to sound urgent now, even if it ultimately expects higher rates later.
The guest says the main triggers for a faster tightening path would be firmer inflation momentum or evidence that job growth, unemployment, and wages are all reaccelerating. He also says residual seasonality can make early-year inflation prints look stronger, which complicates the Fed’s read on the underlying trend and could help justify one additional rate hike in March before the central bank pauses.
On Treasuries, the host says the 10-year yield’s move above 5.25% and back toward 5% reflected both the Fed’s shifting policy outlook and technical flows in a large fixed-income market. The guest expects bond yields to stay highly sensitive to the market’s view of 2027 policy, especially if investors begin to price eventual rate cuts.
Key takeaways
- The guest thinks the Fed can skip a hike now while still preparing markets for more tightening later.
- The guest’s base case is one additional rate hike in March, after which the Fed pauses if inflation starts to decelerate.
- The guest says a stronger inflation trend or a reaccelerating labor market could push the Fed toward hikes at every meeting.
- The host says the 10-year Treasury yield’s rise above 5.25% was driven partly by technical flows, not just policy expectations.
- The guest expects Treasury yields in 2027 to move in line with how investors reprices the Fed’s next move, including possible cuts.
Notable quotes
“we didn't hike rates today. We didn't feel a tremendous sense of urgency to raise rates today but we we think more work is needed”
“the labor market doesn't look like it's overheating. We're only adding about 50,000 jobs a month”
“if inflation's firming, they have to get on top of it”
“in our view, it actually means you still get one additional rate hike in March”
“I would expect 10-year Treasury yields to to fall alongside of those expectations for monetary policy”
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, chief US economist. — Today, the challenge facing the Fed to not hike rates while still convincing investors that you think rate hikes are coming. It's Tuesday, October 27th at 11:00 a.m. in New York. So, Mike, how do you think the Fed and Chairman Wars in particular is going to deal with this challenge?
Well, I think that the way that he can do it is to say obviously we already did hike. So, we've started a process. You know, we're serious about bringing inflation down in a timelier fashion.
So essentially the question is do we want to raise rates at every meeting or do we want to take an action assess incoming data and take a different action. So I do think that the message here can be balanced in a way that says we didn't hike rates today. We didn't feel a tremendous sense of urgency to raise rates today but we we think more work is needed.
So, I I'm not sure that there's urgency to raise rates every meeting, but you can still suggest that rates are going to go higher. You can see I'm having trouble articulating the the story as well. Worsh may have some of the same difficulty, but I think that's the basic message is taking an action, assessing its effect, deciding to take another action.
At the Jackson Hole Symposium in August, Chairman Wars gave a speech and in the speech he invoked this imagery of going on a hike around the mountains of Jackson Hole. And he told us that there were in essence two types of hikes that one could go on around Jackson Hole.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rates
- hiking decision
- treasury yields
- monetary tightening
- forward guidance
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “To Hike or Not to Hike” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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