Barclays Sees Two More Rate Hikes After Warsh Signals Hawkish Stance

Barclays analysts are now expecting two more interest rate hikes this year from the US Federal Reserve, following recent remarks by Fed Chair Kevin Warsh. In a notable hawkish stance, Warsh emphasized that inflation is too high and financial conditions are not restrictive enough to support price stability. The brokerage had previously expected no further rate hikes through the end of 2023.

Warsh's speech at the Jackson Hole symposium on August 31 signaled a more aggressive approach to tackling inflation, which remains above the central bank's target of 2%. He stated that policymakers would 'have work to do' if they lacked confidence in returning inflation to its target range. This implicit case for further tightening comes despite Warsh's continued opposition to providing explicit forward guidance.

Markets are pricing in a 60.4% chance of a rate hike in September, according to the CME Group's FedWatch tool. Interest rate futures show investors have increased bets on a September rate hike following Warsh's remarks. The focus is now shifting to the Fed's policy decision on September 16 for further clues on the rate path.

Although Barclays still expects monthly inflation readings to come in 'much softer' than longer-horizon measures, they note that unfavorable base effects will work against progress by those metrics through year-end. This nuance suggests a cautious approach to predicting future interest rates, given the complex interplay between economic indicators and monetary policy decisions.