Morgan Stanley turned more hawkish in a report dated Sept. 15, predicting that the U.S. Federal Reserve will raise interest rates by 25 basis points both this week and again in December. The bank also revised its European Central Bank view, now expecting another 25-basis-point increase in December.
According to Reuters, Morgan Stanley said the main reason for the shift was that U.S. disinflation has been "slower and less convincing than policymakers need." The Fed meeting is scheduled for Sept. 15-16, with the decision due at 2 a.m. Taiwan time on Sept. 17.
If the Fed follows Morgan Stanley’s path, the target range would rise from the current 3.50% to 3.75% to 4.00% to 4.25% after two hikes. The report said rates have not moved since the cut in December 2025. A move this week would mark the Fed’s first rate increase since 2023.
Four reasons behind the call
Morgan Stanley listed four reasons for its revised forecast. First, higher energy prices are creating second-round effects. Second, demand tied to AI investment remains strong. Third, the neutral rate may be temporarily higher. Fourth, the Fed needs to maintain its anti-inflation credibility.
In the report’s framework, second-round effects mean oil prices are not only lifting gasoline costs directly, but are also feeding through transportation and input costs into a broader set of goods and services. The neutral rate refers to a level that neither stimulates nor restrains the economy. If that level has moved up, current policy may no longer look restrictive enough.
Oil is the clearest source of pressure. Data from the St. Louis Fed’s FRED database showed Brent crude closing at $88.24 a barrel on Aug. 25, rising to $100.52 on Sept. 3 and then to $109.51 on Sept. 9, a gain of 24% in just over two weeks.
Inflation data also remained firm. The U.S. Bureau of Labor Statistics said on Sept. 11 that August CPI rose 0.4% month over month and 3.4% year over year. Core CPI, which excludes food and energy, rose 0.3% from the previous month, above the 0.2% market expectation, and was up 2.4% from a year earlier. Gasoline prices climbed 3.9% in a single month and accounted for more than one-third of the overall monthly CPI increase.
Markets have already leaned toward a hike
Market pricing has moved in that direction. CME FedWatch on Sept. 14 showed roughly a 90% probability of a 25-basis-point hike this week. On Polymarket, the probability for the same outcome stood at 88.5%.
Standard Chartered said in a Sept. 15 report that futures markets were pricing in 74 basis points of cumulative tightening through March 2027, roughly equivalent to three hikes. That is one more move than Morgan Stanley expects for the remainder of this year.
Morgan Stanley also revised its ECB view
The bank withdrew its earlier call that the ECB’s hiking cycle had ended. It now expects the ECB to raise rates by another 25 basis points in December, taking the deposit rate to 2.75%, with only one rate cut in 2027, expected in December of that year.
Morgan Stanley tied that revision to resilient eurozone growth and higher energy prices. According to the ECB’s website, the deposit rate was lifted from 2.00% to 2.25% on June 17, then raised again to 2.50% at the Sept. 10 meeting, effective Sept. 16. If Morgan Stanley’s forecast is correct, the ECB will have raised rates three times this year, for a cumulative increase of 0.75 percentage points.
Economists remain divided
Opposition to further tightening has also picked up. Mark Zandi, chief economist at Moody’s Analytics, wrote on social media on Sept. 14 that the odds of a serious Fed policy mistake were "uncomfortably high and rising." He argued that if the Fed wants to push inflation down faster through tighter policy, it would need to force economic growth below its potential rate, a path that would be hard to separate from layoffs, a higher unemployment rate, and a self-reinforcing negative cycle.
Zandi had already made a similar case in a July 28 interview with CNN, saying a basic rule of monetary policy is not to react to supply shocks. At the time, he said, "I don’t think they should raise rates." In his view, rising oil prices are a supply shock, which is why he opposes using rate hikes to deal with this inflation episode.
Standard Chartered said in its Sept. 15 report that it expects the Fed to leave rates unchanged on Sept. 16 and that a hike would be the wrong choice. The bank argued that tariffs have pushed up the core PCE price index and may have caused core inflation to be overstated. It also said an upcoming comprehensive GDP revision from the U.S. Commerce Department could slightly revise recent inflation readings lower. Standard Chartered’s position is that the Fed should wait until uncertainty around tariffs and data revisions clears. The bank also warned that hiking too early and then reversing course would damage the Fed’s credibility.
Michael Pearce, U.S. economist at Oxford Economics, told The National that the decision is very close. In his view, the key question is whether policymakers are satisfied with the pace of inflation’s decline.
William Dudley says the case for a hike is clear
William Dudley, former president of the Federal Reserve Bank of New York, took the opposite side. In a Bloomberg Opinion column published on Sept. 15 under the headline The Rationale for Raising Rates Is Crystal Clear, he wrote that the case for tighter monetary policy is already strong. He said a September hike may not be a one-off move, but the beginning of a broader series of increases.
Dudley argued that U.S. inflation remains above the Fed’s 2% target and that the labor market is still relatively stable. August core CPI rose 0.3% month over month, which in his view has made investors less confident that inflation will cool quickly. Referring to the Fed’s dual mandate of price stability and maximum employment, he said the institution is clearly further from its target on price stability, and that inflation still carries upside risk in the near term.
He also mentioned the political cost of tightening at the start of the column. Republicans are trying to defend their narrow majorities in both chambers of Congress in the November midterm elections, which the report described as difficult to begin with. Tighter monetary policy would not be welcomed by President Donald Trump and Republicans. The report also noted that Jerome Powell cut rates three times in 2025, yet Trump was still unhappy, and that Kevin Warsh only took over as chair in May and is facing a rate decision less than four months into the job. Dudley is currently also a member of Coinbase’s advisory council.