Barclays now expects the Federal Reserve to raise rates by 25 basis points in both September and December, reversing its prior call for no changes in 2026. The bank cited Fed Chair Kevin Warsh's hawkish Jackson Hole speech, in which he said inflation is running above target and the central bank still has more work to do to bring it down.
Barclays scrapped its steady-state Fed forecast after Fed Chair Kevin Warsh's Jackson Hole speech. Economists led by Jonathan Millar described the speech as hawkish, and the bank now expects 25-basis-point rate increases in both September and December. The call marks a U-turn from Barclays' earlier expectation of no rate changes in 2026, published August 31.
Warsh signals inflation is the priority
Speaking at the Jackson Hole Economic Policy Symposium on August 28, Warsh said the labor market is consistent with full employment but described price stability as the Fed's central concern. According to The Motley Fool: "the Fed's predominant focus right now should be on prices".
Warsh affirmed the Fed's 2% PCE inflation target as a firm, fixed target and said inflation is neither self-executing nor necessarily mean-reverting, according to Barclays' account of the speech. He added that policymakers need confidence inflation is moving toward target quickly enough, or there is more work to do, per Barclays' summary of the remarks. Barclays noted Warsh leaned more heavily on six- and twelve-month inflation measures than on the three-month readings it had been emphasizing.
Data behind the shift
Core PCE prices rose 0.25% in July, exceeding Barclays' forecast by about six basis points. That prompted the bank to raise its fourth-quarter core PCE forecast by 0.1 percentage point to 3.3%. Even so, broader trends still look more encouraging than earlier this year: core PCE inflation slowed to a 3.0% three-month annualized pace in July, down from 3.9% in the prior three-month period.
Markets moved quickly. The CME FedWatch tool showed a 60.4% probability of a September hike after the speech, up sharply from where it stood days earlier.
Two-year Treasury yields climbed roughly 12 basis points in the aftermath. Barclays also expects unfavorable base effects to slow progress on inflation metrics later in the year, meaning annual figures could look stubborn even if monthly readings soften.
What comes next
All eyes now turn to the FOMC meeting scheduled for September 16, 2026. Warsh, who succeeded Jerome Powell as Fed chair in late May, has already scrapped conventional forward guidance from FOMC statements, leaving markets to parse his public remarks for direction. Barclays' economists concluded that Warsh's overall assessment leaves little ambiguity about the direction of travel, with the burden of proof now on those arguing against further tightening.
Sources: Investing.com, The Motley Fool, Crypto Briefing
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