Barclays Analysts Update Fed Rate Outlook and Present 2026 Expectations

Last week, the Federal Reserve System held its final meeting under the leadership of Jerome Powell and, as expected, kept interest rates unchanged. While rates remained the same, experts believe that what changed was the Fed’s characterization of inflation.

The decision to keep rates unchanged was largely anticipated. What came as a surprise was the shift in language: inflation, previously described as “somewhat elevated,” is now characterized as high. Powell noted that inflation remains elevated and that rising energy prices, in particular, are expected to create upward pressure in the short term.

In this context, it suggests that the rate cuts expected by markets later this year may occur later than previously anticipated.

Fed Outlook Shifts

At the same time, the change in inflation assessment has also impacted forecasts. As a result, Barclays revised its expectations for Fed policy.

Barclays abandoned its forecast for a rate cut in September and now expects interest rates to remain stable until 2026.

Last week, Morgan Stanley also stated that it expects the Fed to maintain stable rates throughout 2026.

Potential Rate Hikes Amid Geopolitical Risks

Despite shifting expectations, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, signaled the possibility of rate hikes.

Kashkari stated that war could, in some cases, necessitate higher interest rates. He pointed out that the ongoing conflict between the United States and Iran has increased inflationary pressure, meaning the Fed may need to raise rates in certain scenarios.

He emphasized that the longer the conflict lasts, the stronger the inflationary pressure becomes. Even if the war were to end immediately, it could take months to restore supply chains and bring inflation down.

Kashkari highlighted that the Fed’s main challenge now is the highly uncertain trajectory of inflation. He stressed that policymakers must remain flexible when making future rate decisions.

In conclusion, Kashkari expressed his willingness to work with Kevin Warsh, a potential future Fed chair, and stated that he takes Warsh’s concerns seriously.

Market Context

The prediction market Polymarket assigns a 64% probability to a downside scenario toward $80, reflecting the realism of this risk.

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