Barclays has reversed its previous call for the Federal Reserve to leave rates unchanged through the rest of 2026 and now expects two 25-basis-point increases, one in September and another in December. The shift followed Federal Reserve Chair Kevin Warsh’s Jackson Hole speech, where he argued that inflation remains too high and said policymakers would still have “work to do” if they could not be confident that price pressures were moving clearly back toward the Fed’s 2% target.
The change in forecast places Barclays among the more hawkish voices on the U.S. rate outlook and reflects a broader repricing across financial markets. At the time of the forecast revision, futures markets were assigning roughly a 60% probability to a September rate increase, sharply higher than before Warsh’s remarks.
Key Overview
- Barclays now expects the Fed to raise rates by 25 basis points in September and another 25 basis points in December.
- The brokerage had previously expected no further rate changes during the remainder of 2026.
- Warsh said inflation remains above the Fed’s 2% objective and that the labor market is consistent with full employment.
- The Fed’s current federal funds target range remains 3.50% to 3.75%.
- July PCE inflation stood at 3.7% year over year, well above the central bank’s target.
- Three voting policymakers had already preferred a 25-basis-point hike at the Fed’s July meeting.
- Markets sharply increased the probability of a September hike following Warsh’s speech.
Warsh Puts Inflation Back at the Center of Fed Policy
Warsh used his first Jackson Hole address as Fed chair to make clear that price stability remains the central bank’s immediate concern. He said the labor market was broadly consistent with full employment while inflation readings remained uncomfortably high, making the price side of the Fed’s dual mandate the more pressing challenge.
The latest official data support that concern. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, rose 3.7% in the 12 months through July, unchanged from June and still well above the 2% goal. Warsh also highlighted elevated six-month inflation measures, arguing that policymakers should not assume inflation will automatically return to target without sufficiently restrictive monetary policy.
He also challenged the idea that current financial conditions are restrictive enough to guarantee further disinflation. That matters because a central bank that believes monetary conditions are too loose has a stronger case for raising rates even when economic growth remains positive and unemployment is low.
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Barclays Reverses Its Year-End Rate Outlook
Barclays interpreted the speech as a meaningful change in the policy signal and shifted its forecast from no further moves in 2026 to two quarter-point increases. If both hikes occur, the federal funds target range would rise from the current 3.50%-3.75% to 4.00%-4.25% by year-end.
The brokerage described Warsh’s remarks as notably hawkish even though the Fed chair continued to resist giving markets explicit forward guidance. Barclays expects monthly inflation readings to soften, but it believes unfavorable base effects could keep longer-horizon inflation measures elevated through the end of the year.
The September meeting is particularly important because the Fed has already shown signs of internal pressure to tighten. At its July 28-29 meeting, the Federal Open Market Committee held rates at 3.50%-3.75%, but Beth Hammack, Neel Kashkari and Lorie Logan dissented in favor of a 25-basis-point increase.
Markets Reprice the September Meeting
Warsh’s comments triggered an immediate shift in rate expectations. The Barclays report cited the CME FedWatch tool as showing a 60.4% probability of a September hike, compared with materially lower odds before the speech. Later market coverage on August 31 placed the probability at around 57%, showing that pricing remained fluid but still clearly leaned toward tightening.
The change also pushed short-term U.S. Treasury yields higher and supported the dollar as investors adjusted to the possibility that rates could remain higher for longer. The next FOMC decision is scheduled for September 16, after the two-day meeting beginning September 15.
Upcoming labor-market and inflation releases will therefore carry unusual weight. A stronger jobs report or another stubborn inflation reading would strengthen the case for a September increase, while unexpectedly weak activity or softer price data could challenge the hawkish repricing.
What Two More Rate Hikes Would Mean
Two additional quarter-point increases would mark a significant turn from expectations earlier in 2026, when many investors were still focused on when the Fed might begin easing policy. Instead, persistent inflation has shifted the debate back toward whether the central bank needs to tighten further.
Higher policy rates would likely keep borrowing costs elevated across mortgages, corporate debt and consumer credit while increasing the relative appeal of cash and short-duration fixed-income assets. They could also support the dollar but place pressure on equities and emerging-market currencies if global investors move toward higher-yielding U.S. assets.
For now, Barclays’ new forecast is a projection rather than a certainty. Warsh explicitly stopped short of committing to a particular September decision, emphasizing instead that policy will depend on whether incoming data provide convincing evidence that inflation is returning to target.
Sources: Reuters / Federal Reserve Board / U.S. Bureau of Economic Analysis
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