Barclays, SocGen see 2 Fed hikes in 2026 as inflation persists

Barclays and Societe Generale forecast the Federal Reserve will raise rates in September and December, lifting the fed funds target to 4.00%-4.25% as inflation runs persistently above the 2 percent goal.

"Recent data have been mixed, and a rate increase is warranted if inflation disappoints," Susan Collins, president of the Federal Reserve Bank of Boston, said this week, reflecting the hawkish tilt spreading across the central bank's policy committee.

The fed funds rate has sat at 3.50%-3.75% since December 2025, when the Fed concluded a 15-month easing cycle that delivered 175 basis points of cuts from the 5.25%-5.50% peak reached in 2023. Traders now price at least one 25-basis-point hike this year. The Treasury auctioned $44 billion in seven-year notes Wednesday at a yield of 4.512 percent, the highest since December 2024. The euro traded at $1.1646 against the dollar, while gold held near $4,600 an ounce after touching a three-month high of $4,696.18 on Tuesday.

Two hikes would mark the first tightening since the 2022-2023 cycle that pushed rates from zero to 5.25%-5.50% and sent the S&P 500 down 19 percent in 2022. A repeat of that dynamic would pressure equity valuations, strengthen the dollar further, and raise borrowing costs for corporations and consumers — a combination that could slow the S&P 500's 12 percent year-to-date advance.

The repricing has been building for weeks. Inflation has remained persistently above the Fed's 2 percent target, and the labor market shows little sign of cracking — initial jobless claims fell to 203,000 in the week through Aug. 22, down 4,000 from the prior week. Fed Chair Kevin Warsh's debut speech at the Jackson Hole symposium Friday is expected to provide the clearest signal yet on the central bank's policy path, with markets hanging on any comment about inflation and the Treasury's efforts to bring down long-term borrowing costs.

The last time the Fed shifted from easing to tightening this abruptly was in 2022, when it went from zero rates to 5.25%-5.50% in 18 months. The S&P 500 fell 19 percent that year and the Nasdaq dropped 33 percent as the hiking cycle compressed valuations across growth sectors. The current repricing is less dramatic — markets had already priced in a pause, not further cuts — but the direction of travel is unmistakable.

Rate Differentials Widen as Global Central Banks Tighten

The Fed's hawkish repricing is part of a broader global shift. The Bank of Korea raised rates again this week while lifting its growth and inflation forecasts. The Bank of Japan faces nearly 90 percent odds of a hike at its next meeting, according to overnight index swaps, after Tokyo core inflation accelerated to 1.8 percent in August — a third straight monthly increase. The Reserve Bank of Australia kept its cash rate at 4.35 percent in August, but meeting minutes showed policymakers divided over whether another increase was warranted.

European banks face similar pressure. Eurozone business lending fell again in July as rising borrowing costs weigh on the currency area's economy ahead of another expected European Central Bank rate rise. Countries with large debt burdens — France, Italy, the U.K., and Japan — have come under the heaviest pressure in bond markets in recent months, with the seven-year Treasury yield at 4.512 percent reflecting the broader repricing of long-duration risk.

The bond market has become the stock market's new fear index, as traditional risk gauges fail to capture the myriad issues facing the economy. Yields on long-dated Treasurys have climbed steadily through the summer, and the seven-year auction at 4.512 percent marks the highest level since December 2024. If the Fed delivers two hikes, the yield curve could steepen further as investors demand higher compensation for holding longer-dated paper, putting additional pressure on rate-sensitive sectors such as real estate and utilities.

If the Fed follows through with hikes in September and December, the fed funds rate would reach 4.00%-4.25% by year-end — still well below the 5.25%-5.50% peak of the last cycle but a significant reversal from the easing path markets expected at the start of 2026. The September FOMC meeting will be the first test. If Warsh's Jackson Hole speech indicates openness to a hike, the market's pricing of two moves could solidify. If he pushes back, the hawkish bets could unwind quickly, sending yields lower and equities higher.

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