MS September FOMC Reaction Further hikes ahead

M September 17, 2026 12:10 AM GMT

US Economics and Fixed Income Strategy | North Morgan Stanley & Co. LLC Idea

Michael T Gapen America Chief US Economist

September FOMC Reaction: Matthew Hornbach Strategist

Further hikes ahead Jay Bacow Strategist

Sam D Coffin We now expect two additional 25bp rate hikes in December and Economist March, bringing the target range to 4.25-4.5%. The repeated Diego Anzoategui Economist language around removing accommodation, mentions of

geopolitical risks, and a revision up of the neutral rate in the Arunima Sinha Global Economist projections all leaned hawkish.

Heather Berger Economist Key points

Lingdi Xu • The Fed hiked its policy rate by 25bp to 3.75-4.0%. We now project Economist 50bp of further tightening for a terminal target range of 4.25-4.5% in

1Q27. Andrew M Watrous Strategist

• The median dot showed one additional hike this year followed by a

Martin W Tobias, CFA hold next year, but 8 out of 18 participants who submitted forecasts Strategist expected an additional hike next year. The neutral rate estimate in the

projections was revised higher. Mark T Schmidt, CFA Strategist

• Chairman Warsh characterized today's rate hike as removing

accommodation, which we think suggests the Fed has more work to Aryaman Singh Strategist do. Combined with the discussion of ongoing geopolitical risks, we

think this leans in the direction of more hikes than we previously Eli P Carter Strategist expected.

• Our rates strategists think the market is now likely to price in the Janie Xue Strategist probability of more hikes in the short term, given Chairman Warsh's

emphasis on inflation trends. A pull-forward of rate hike pricing Molly Nickolin Strategist should lead investors to think more about downside risks to growth

in the medium term. They suggest investors enter SFRZ6Z7 flatteners Jacob F Bjurstrom Strategist at 40bp, exit September/October FOMC flatteners, and stay long 2y UST-SOFR swap spreads. • Our FX strategists recommend staying long USD/JPY and believe the September FOMC may make further rises in energy prices increasingly USD-positive. • Agency MBS: Stay neutral, but with yields on the index near the highs since the GFC and spreads on the index at the wides of the past year, Morgan Stanley does and seeks to do business with prefer to get long basis on further weakness than sell on strength. companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of • Munis: Our muni strategists are neutral the tax-exempt basis, and interest that could affect the objectivity of Morgan Stanley prefer a duration-neutral barbell. Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

US Economics Michael Gapen MORGAN STANLEY & CO. LLC Sam Coffin Diego Anzoategui Arunima Sinha Heather Berger Lingdi Xu

September FOMC meeting: Two more rate hikes for a terminal target range of 4.25-4.50%

The Fed hiked its policy rate by 25bp to 3.75-4.0% and we now project two more 25bp rate hikes in December and March for a terminal target range of 4.25-4.50%. We expect this target policy rate to remain in place for all of 2027, before progress on inflation opens the door for normalization in 2028. Three things stood out to us as leaning in the direction of more hikes than less going forward. First, the chair said today's decision was about removing accommodation. If policy is not yet restrictive, then the Fed still has work to do. Second, Chairman Warsh repeatedly pointed to geopolitics (e.g. oil and commodity prices) as an important driver of inflation and, in turn, his reaction function. Resolution of the conflict in the Middle East remains elusive. Third, FOMC participants revised higher their assessment of the neutral rate to 3.25% from 3.06% previously. In our view, this tilts things in the direction of two more 25bp rate hikes. A hike in October cannot be ruled out either, in our view.

The decision: The Fed raised its policy rate by 25bp to 3.75-4.0%, a decision that was widely expected…