Barclays Flips to Two Fed Hikes After Warsh Speech

Barclays now forecasts quarter-point Fed hikes in September and December, reversing its prior hold call after Chair Kevin Warsh's hawkish Jackson Hole speech.

Barclays abandoned its earlier expectation that the Federal Reserve would keep rates unchanged for the rest of 2026, and now projects 25-basis-point increases at the September 16 and December meetings. The reversal came directly after Fed Chair Kevin Warsh told the Jackson Hole symposium that policymakers would "have work to do" if they lacked confidence inflation is returning to the 2% target, describing inflation as too high, financial conditions as not sufficiently restrictive, and the labor market as consistent with full employment. Deutsche Bank, meanwhile, continues to expect 50 basis points of tightening this year across the same two meetings.

Barclays called the address "notably hawkish" and said it offered an implicit case for further tightening, even as Warsh continued to oppose explicit forward guidance. Markets moved in step: CME's FedWatch tool priced a 60.4% probability of a September hike on Monday, up from roughly 56% on Friday, according to CNBC.

Warsh's Jackson Hole remarks were, per Reuters reporting cited by Finimize, his clearest hint yet that more tightening may be needed. Barclays flagged "unfavorable base effects" — math quirks from last year's price changes — that could keep longer-run inflation measures looking sticky even if monthly readings soften considerably, and the bank still expects those monthly prints to be "much softer." According to 24/7 Wall St., former Fed Vice Chair Roger Ferguson went further, predicting two hikes across the rest of 2026 and early 2027, arguing the Fed has missed its inflation target for roughly five years and that continued inaction risks a real loss of credibility.

Skepticism remains part of the picture. Miller Tabak chief market strategist Matthew Maley told CNBC there "remains no empirical basis for the rate hike," arguing Warsh is talking up inflation so he can claim credit for taming it when headline measures inevitably come down, and noting labor data has been weak while inflation data has been better than expected since the last FOMC meeting. UOB cautioned Warsh's stance could also be "talking without action," while Nomura said sensitivity to near-term inflation data is now high. 24/7 Wall St. also notes market positioning, per SpotSpotGamma's Brent Kochuba, had flipped toward front-running cuts before the speech.

Gavekal Research told CNBC that Warsh's pledge to keep short-term rates the main policy instrument implies continued shortening of the Fed's balance sheet duration, putting the Fed at odds with the US Treasury, which announced in August it would step up buybacks of long-term securities to prevent long-end yields from rising. According to Susquehanna, Warsh's pledge to return inflation to 2% strengthened the dollar and reversed part of the debasement trade that had lifted gold roughly 14% in August — its strongest monthly gain this century — while gold fell and Asian stocks declined on Monday. Ferguson also warned Treasury intervention may be making market signals harder for the Fed to read, per 24/7 Wall St.

Attention now turns to the September 16 FOMC decision and the incoming inflation and labor-market reports that will precede it. With FedWatch pricing above 60% for a September move, borrowing costs that reset off short-term market rates — variable-rate credit and some small-business loans — can firm up before the Fed even meets, as Finimize explains. The last policy vote produced three dissents, per 24/7 Wall St., so committee votes will be a key tell on whether the hawkish forecast is gaining support. Investors should watch whether monthly inflation prints soften as Barclays expects, or whether base effects keep longer-term measures elevated enough to force the Fed's hand in December.