Wall Street Divided Over Rate Hikes Following Warsh's Hawkish Speech

Federal Reserve Chair Kevin Warsh's recent speech at Jackson Hole has left investors and forecasters on Wall Street divided over whether interest rates will be hiked in September.

Markets are now pricing in a 66% chance of a rate hike, up from 41% just a week ago. However, while some firms see a hike as likely, others believe the Fed will maintain its current stance.

Morgan Stanley, one of the top firms on Wall Street, does not think a rate hike is imminent. In a note to clients, the bank pointed out that Warsh's speech was more in line with former Fed Chair Ben Bernanke's approach, which emphasized slow and measured rate hikes. The bank believes inflation will continue to moderate, allowing the FOMC to keep rates unchanged.

On the other hand, Bank of America sees a rate hike as its base-case scenario. The firm believes Warsh has raised the bar for standing pat by arguing that the Fed should focus on trends rather than isolated data points, and that underlying inflation hasn't meaningfully improved.