Barclays has shifted its interest-rate outlook after Federal Reserve Governor Kevin Warsh’s speech at the Jackson Hole symposium, calling his remarks "quite hawkish" and moving to expect a 25-basis-point rate increase in September followed by another 25-basis-point rise in December.
Economists led by Jonathan Millar summarized Warsh’s presentation as opening with personal recollections of "brisk and leisurely hikes" shared with former Fed officials Kohn and Bernanke at the Grand Tetons. While Millar and his team said that opening anecdote was unlikely to be a signal about the pace of future tightening, they wrote that "the remainder of the speech was notably hawkish."
Barclays’ economists report that Warsh portrayed an economy that has gained strength. He judged labor markets to be consistent with full employment and said he would be "hard pressed to describe broad financial conditions as restrictive." In his remarks he also pointed to robust consumer spending, brisk capital expenditures, and easy credit conditions as signs of ongoing economic momentum.
The bank highlighted that Warsh’s comments on inflation were particularly stringent. According to Barclays, Warsh placed more emphasis than anticipated on the sluggishness of disinflation, reiterating that the Fed’s 2% PCE inflation target is a "firm, fixed target." He added that inflation is "neither self-executing nor necessarily mean-reverting," and said policymakers must be confident inflation is moving toward the target "clearly and at sufficient speed," or else "we have work to do."
Barclays noted a methodological difference between Warsh’s framing and the bank’s preferred measures of inflation. The governor relied heavily on six- and twelve-month inflation measures in his assessment, while Barclays has tended to emphasize three-month measures, which currently present a more encouraging picture.
On actual data, core PCE prices rose 0.25% in July, about 6 basis points above Barclays’ forecast. That stronger-than-expected monthly reading led the bank to raise its fourth-quarter core PCE projection by 0.1 percentage point to 3.3%.
Nevertheless, Barclays’ economists stressed that broader trends remain more encouraging than earlier this year. They pointed to a slowdown in the three-month annualized pace of core PCE inflation to 3.0% in July from 3.9% in the prior three-month period. Revised official data also showed a larger temporary boost to private demand in the second quarter: consumer spending was revised up to a 3.5% annualized growth rate and private domestic final purchases to 4.2%, the fastest pace since early 2023.
Despite the stronger second-quarter revisions, Barclays continues to expect demand will moderate in the second half of the year, noting that consumer spending was flat in July.
Warsh also reiterated his opposition to conventional forward guidance and emphasized a preference for what he called "a discipline, not a decision." Even so, Barclays’ economists concluded that his overall economic evaluation "leaves little ambiguity about the direction of travel," and that the burden of proof now falls on those arguing against additional policy tightening.
Contextual note: The bank’s updated forecast and interpretation of Warsh’s speech reflect its reading of the governor’s focus on medium-term inflation measures and his insistence on confidence that inflation is moving to the 2% target at a satisfactory pace.