The market may be wrong about September: Morgan Stanley

The market decided after Federal Reserve Chair Kevin Warsh's speech at Jackson Hole last week that the U.S. central bank would most likely begin raising interest rates as soon as September.

However, Morgan Stanley was going against the flow with a research note led by its Chief U.S. Economist Michael Gapen, issued late Friday.

On Monday traders were pricing in a 66% probability for a 25-basis-point rate hike at the September meeting, up from 57% on Friday and 41.4% a week earlier, according to the latest data from CME Group's FedWatch tool.

Gapen points out that the "straight read of Warsh's speech was hawkish," but still the economist wrote, "We are not convinced it means hikes are coming."

With that, Morgan Stanley is maintaining its view for the Fed to keep rates on hold this year "on evidence of disinflation," according to Gapen. And if the firm is wrong, he writes that the central bank will likely hike by 50 to 75 basis points rather than something more aggressive.