Barclays Fed Rate Forecast: Two-Hike Call Holds Into December

A call that is half done

On August 31, Barclays dropped its forecast that the Federal Reserve would keep rates unchanged for the rest of 2026. It now expected two quarter-point hikes, one in September and one in December. The trigger was Chair Kevin Warsh's first Jackson Hole speech, which the bank called "notably hawkish." Barclays said the speech made an implicit case for tightening, even though Warsh still refused to give explicit forward guidance. Warsh told the symposium that policymakers would "have work to do" if they could not be confident inflation was heading back to 2%. He also described the labor market as consistent with full employment.

Six weeks later, the first half of that forecast has come true and the second half has become Wall Street's consensus. On September 16 the Fed voted 12-0 for a quarter-point hike to a 3.75%-4% range, its first increase since 2023.13 A Reuters factbox dated October 15 still lists Barclays as expecting one more 25-basis-point hike, in December, which would take the range to 4.00%-4.25%.22 That is where the August forecast pointed all along. A plain hold-forever outlook would have been wrong. Barclays saw the turn early and has kept the call through a volatile stretch since.

Why Barclays saw it coming

The bank's argument in August rested on a statistical point as much as on the Fed's tone. Barclays expected monthly inflation readings to be much softer than the longer-run measures Warsh tends to cite. But it warned that unfavorable base effects would slow progress on those measures through year-end. Put simply, earlier low readings would drop out of the 12-month comparison, so annual inflation could stay sticky even if each month looked better.

The bank repeated that view in its pre-CPI research in October. It argued that the 6- and 12-month inflation gauges Warsh prefers were unlikely to improve much this year, though the 2027 outlook looked much better.24 It also forecast a hold in October and a December hike. Fed officials, it argued, would want more data to confirm the trend even though near-term inflation risks pointed higher.24 Barclays' weekly client note made the same case. It said the September minutes and hawkish comments from Governor Christopher Waller supported another hike after a likely October hold.25

The CPI shock that tested the forecast

The September inflation report, released October 14, was the toughest test yet for the timing. Headline CPI rose 0.6% for the month and 3.7% from a year earlier. Core CPI rose 0.3% and 2.6%, and economists had expected less on both measures.31 Gasoline jumped 9.1% and made up half of the index's increase.31 The core reading still unsettled investors because the gains spread well beyond fuel. Carson Group's Sonu Varghese pointed out that core inflation ran at a 3.7% annualized pace in September.31

On headline inflation, the bank got it right. Barclays' research team had expected energy to push headline CPI to 3.7% alongside a more moderate core.25 Core was where it missed: Barclays had forecast a 0.24% monthly core gain, below the 0.3% that was reported.2431 The miss matters because core inflation is the Fed's main gauge of whether an energy shock is spreading into other prices.

Markets reacted sharply. CNBC reported that CME FedWatch odds of an October 28 hike rose to 53.7% from 22.1% a day earlier. Traders also put roughly 40% odds on rates being a full half-point higher by year-end.30 Those numbers then fell back. By the time Reuters published its factbox, futures showed about a 27% chance of an October hike and an 89.5% chance of a December move.22 Reports of the exact intraday peak vary between outlets. They all describe the same arc: a burst of October bets that faded, while December became close to certain.39

Where the coverage agrees, and where it splits

The broad picture is consistent across reports. Most big banks expect a December hike. Citigroup is the latest to join that view after previously forecasting no change in 2026.2229 BofA is the main outlier, with hikes forecast for both October and December.56 Commerzbank also expects no move until December, though it describes a December hike as effectively a "done deal."54

The split is over whether October is truly in play. Capital Economics' Stephen Brown said the broad-based core surprise brought an October hike back into consideration.59 On the other side are the calendar and recent Fed messaging. The October 28 decision falls six days before the midterms, and the Fed has hiked inside that window only once since 1990.55 UBS has called an October move just before the election "politically untenable."55

Politico raised a sharper point. Vice Chair Philip Jefferson and New York Fed President John Williams had signaled no rush. Hiking now would therefore cost the Fed credibility. One adviser said that if the Fed did it after saying it wouldn't, "nothing they say means anything ever again."66 SGH Macro's Tim Duy said an October hike would amount to Warsh throwing his colleagues "under the bus" and admitting he depends on single data points.66

Our reading is that the case for December is stronger than the case for October, and Barclays' timing looks right. Recent comments from Fed officials have mostly been about when to hike, not whether. Waller said the hikes "do not need to come at consecutive meetings."2 Boston Fed President Susan Collins said raising rates "a bit further before the end of the year" would be appropriate.59 Williams still sees one more hike this year but not necessarily any in 2027.59 That is a committee setting up a December move, not reacting to one inflation report.

The bigger risk to Barclays' forecast is in the other direction: the December hike could be larger than 25 basis points. Prestige Economics' Jason Schenker, who called the September move early, has floated a half-point hike in December. He argues that the October-to-December gap brings two more jobs reports and another CPI release.43

What it means for banks and borrowers

The hike has already reached bank lending rates. The September decision raised interest on reserve balances to 3.9% and the discount rate to 4%.9 The Fed's H.15 data show the bank prime loan rate at 7.00% and the effective fed funds rate at 3.88% through mid-October.10 A December hike would almost certainly push prime up again. That rate drives many credit cards, home equity lines and small-business loans. Warsh himself admitted that short-term borrowing such as HELOCs, credit cards and auto loans would get more expensive, and said mortgage rates had "not been good."16

Longer-term rates have tightened conditions on their own. The 10-year Treasury yield stood at 5.21% on October 13, and the 30-year was at 5.56%.10 Warsh linked the rise partly to "competition for capital" as AI hyperscalers raise money in debt markets.18 For banks, the result is a mixed picture. Higher short-term rates can lift returns on floating-rate assets. But a stalling housing market and wages lagging prices could strain borrowers. Average hourly earnings are up 3% from a year ago, against 3.7% inflation.32 Several outlets note that rising mortgage rates are already weighing on housing.43

Barclays has a direct stake in this as well as a forecast. Coverage of its August call noted that its consumer, card, corporate and investment-banking units all depend on funding costs. That makes net interest income and trading revenue sensitive to where the Fed ends up. Its next results are due October 22. Analysts are likely to ask how it is positioned for higher US rates.

The last word before the blackout

Warsh's Bangkok fireside chat with IMF Managing Director Kristalina Georgieva is the last major Fed appearance before the blackout. It is scheduled for late Thursday New York time, and the blackout starts Saturday.412 He has promised not to steer markets with his own near-term outlook.41 BofA strategist Meghan Swiber said investors are "waiting for Warsh to bless the Fed's future rate hike path."43 Georgieva has already backed tighter policy. She called this a good time for a "prudently hawkish bias" and praised the Fed's September hike.47

If Warsh sticks to his usual refusal to give guidance, the most likely outcome is a hawkish hold on October 28 and a hike on December 9. That would complete Barclays' August forecast almost to the letter. The more open question is what follows. Fixed-income markets are already pricing one or two more hikes in 2027.28 A forecast that started as "two more this year" may turn out to understate how long the tightening cycle lasts.