Barclays just tore up one of its most stable macro calls of the year. The bank now expects two separate Fed rate hikes in 2026, a sharp reversal from its earlier view that the Federal Reserve would leave borrowing costs untouched through year-end. The shift came just days after new Fed Chair Kevin Warsh delivered a pointed warning about inflation at the Jackson Hole Economic Policy Symposium, and bond markets didn’t wait around to react.
Summary
Key takeaways
- Barclays now forecasts two 25 basis point rate hikes in September and December 2026, replacing its prior call of no rate changes this year.
- Fed Chair Kevin Warsh’s August 28 Jackson Hole speech flagged PCE inflation at roughly 3.7%, nearly double the Fed’s 2% target.
- The CME FedWatch tool showed a 60.4% probability of a September rate hike after Warsh’s remarks.
- Two-year Treasury yields rose about 12 basis points in the immediate aftermath of the speech.
- The next major test comes at the FOMC meeting scheduled for September 16, 2026.
Barclays Revises Fed Rate Hike Forecast for 2026
Barclays’ updated call answers a question markets had largely stopped asking: whether the Fed still has room to tighten. The bank’s revised forecast, published August 31, 2026, points to two quarter-point moves before the year closes out.
Forecast Changed from No Rate Hikes to Two Increases
Until this revision, Barclays had assumed the Fed would hold steady through 2026, a position consistent with the broader market narrative of policy stabilization. That assumption is now gone. The bank’s economists have swapped a flat-rate outlook for a tightening path, a shift that carries weight given how closely institutional forecasts like this one shape trader positioning heading into the fall.
Timing and Size of Expected Rate Hikes
Barclays expects the Fed to raise rates by 25 basis points in September and again by 25 basis points in December. That timeline lines up almost exactly with the two remaining marquee FOMC meetings of the year, suggesting the bank sees little chance of the central bank waiting longer to act.
Impact of Fed Chair Kevin Warsh’s Jackson Hole Speech
Warsh’s Jackson Hole appearance on August 28 is the single event that pushed Barclays to change course. His remarks read less like a routine policy update and more like a signal that the inflation fight isn’t finished.
Hawkish Tone Emphasizes Persistent Inflation Above Target
Warsh, who took over as Fed chair from Jerome Powell in late May, told the Jackson Hole crowd that policymakers still lack confidence inflation is heading back to target. He cited PCE inflation running at about 3.7% on a 12-month basis, nearly double the Fed’s 2% goal. His framing was direct: if that confidence isn’t there, he said, there is “work to do.”
Labor Market at Full Employment Demands Restrictive Measures
Warsh also pointed to a labor market sitting at full employment, a condition he used to argue that the economy can absorb tighter financial conditions without breaking. That combination, sticky inflation paired with a resilient job market, is the exact setup that tends to push central bankers toward more hawkish action rather than less.
Market Reaction: Treasury Yields and FedWatch Probability Shift
Bond traders moved fast. Two-year Treasury yields climbed roughly 12 basis points in the hours following the speech, a rapid repricing that reflects how seriously markets took Warsh’s language. The CME FedWatch tool told a similar story, showing the probability of a September hike jumping to 60.4%, up sharply from where it stood just days before Jackson Hole.
Reasons Behind Barclays’ Forecast Change
Beyond Warsh’s tone, Barclays pointed to a technical wrinkle in the inflation data that makes the back half of 2026 harder to read than the first.
Unfavorable Base Effects Impact Inflation Progress
The bank flagged what economists call unfavorable base effects, the mathematical quirk where easy year-over-year comparisons from earlier in 2026 start disappearing as the calendar turns toward Q4. Those comparisons had flattered the headline inflation numbers for months. Without them, the same underlying price pressures could suddenly look worse on paper even if nothing changes month to month.
Outlook on Inflation Through Year-End and Implications
That’s the crux of Barclays’ concern: even if monthly inflation readings soften, the annual figures could stay stubborn or tick higher heading into the final quarter of the year. For a Fed chair already worried about credibility on the 2% target, that kind of data drift leaves little room to sit still.
Looking Ahead to the September FOMC Meeting
All of this now funnels into one date: the FOMC meeting set for September 16, 2026. It’s the first real opportunity for Warsh’s Fed to translate Jackson Hole rhetoric into an actual policy move, and traders are already pricing in a strong likelihood that it happens. Whether Barclays’ full two-hike call plays out will depend heavily on how the incoming inflation and labor data hold up between now and December, but the direction of travel has clearly shifted from pause to tightening.
FAQ
Why did Barclays revise its Fed rate hike forecast for 2026?
Barclays revised its forecast after Fed Chair Kevin Warsh’s hawkish speech emphasized persistent inflation above target and a strong labor market requiring more restrictive financial conditions.
What were the key points in Fed Chair Kevin Warsh’s Jackson Hole speech?
Warsh highlighted that inflation remains above the 2% target, with PCE inflation at about 3.7%, that the labor market is at full employment, and that additional policy tightening might be necessary.
How did the markets react to Warsh’s speech?
Two-year Treasury yields rose approximately 12 basis points, and the CME FedWatch tool showed an increased probability, 60.4%, of a rate hike in September.
What inflation challenges does Barclays foresee toward the end of 2026?
Barclays cited unfavorable base effects that slow inflation progress and could cause annual inflation figures to remain stubborn or increase heading into the fourth quarter.
Article produced with the assistance of artificial intelligence and reviewed by the editorial team.
