Barclays Sees Two Fed Rate Hikes After Warsh's Hawkish Speech

Barclays reversed its call for unchanged Fed policy, now pricing two quarter-point hikes before year-end.

Barclays now expects the Federal Reserve to raise rates by 25 basis points in September and December, reversing its earlier call for no further moves after Chair Kevin Warsh's hawkish Jackson Hole speech.

"If officials can't get comfortable that inflation is heading back to the Fed's 2 percent target, they still have work to do," Warsh said at the central bank's annual symposium, according to Reuters. His remarks indicated inflation remained elevated, financial conditions were not sufficiently restrictive, and the labor market was broadly consistent with full employment.

Barclays described the speech as notably hawkish and said it provided an implicit argument for further tightening. The brokerage nevertheless expects monthly inflation readings to soften considerably, though it warned that unfavorable base effects could make progress on longer-term inflation measures more difficult through year-end. Financial markets have moved in the same direction: CME Group's FedWatch tool implies a 60.4 percent probability of a September hike. Societe Generale has also revised its forecast to expect hikes in September and December.

The shift in Barclays' outlook highlights how the policy debate has moved from whether rates stay unchanged to how much additional tightening may be required. Attention now turns to the Fed's September 16 meeting, where investors will look for clearer signals on the rate trajectory. If inflation data continues to run hot, additional hikes beyond December could come into play; if readings cool sharply, the hawkish path could unwind quickly.

Fed officials have reinforced the hawkish tone. Cleveland Fed President Beth Hammack, a 2026 voter, said inflation will end the year around 3 percent and that the current policy stance is not restrictive for the economy. Chicago Fed President Austan Goolsbee agreed with Warsh that inflation is the main issue. Boston Fed President Susan Collins said a rate increase is warranted if inflation disappoints.

The last time the Fed faced a similar tightening debate was in 2023, when the committee delivered a final 25-basis-point hike in July before holding rates steady for more than a year. That pause preceded a sharp rally in equities and a decline in Treasury yields as markets priced eventual easing. The current setup differs: with inflation still running near 3 percent and the labor market at full employment, the bar for a sustained pause appears higher.

Market Pricing and the September Decision

The September 16 meeting will be the first test of the market's hawkish repricing. Interest-rate futures have already reflected stronger expectations for a near-term increase in borrowing costs. A 60 percent probability of a hike means the market is pricing a coin-flip-plus outcome, leaving room for significant repricing in either direction depending on the next inflation and jobs reports.

For borrowers, the implications are direct. Short-term Treasury yields and interest-rate swap rates often rise ahead of expected Fed moves, and lenders use those market rates as reference points for new loans and floating-rate debt. Variable-rate credit and small-business borrowing costs can firm up even before the Fed meets.

The dollar has also strengthened on the hawkish repricing, adding pressure on emerging-market currencies and commodities priced in dollars. A two-hike path would tighten financial conditions further, potentially weighing on equity valuations in rate-sensitive sectors while supporting banks that benefit from wider net interest margins.

Barclays' revised outlook joins a growing list of sell-side desks adjusting their Fed calls. The key question now is whether other major banks follow suit and whether the data validates the hawkish read. The next inflation report and the August jobs report, both due before the September meeting, will be critical inputs.

This article is for informational purposes only and does not constitute investment advice.