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Economy March 30, 2026

Barclays Says Markets May Overprice Chances of Near-Term Fed Hikes as Oil Rises

Bank warns an extended policy hold or later rate cuts remain plausible unless core inflation shows sustained acceleration

By Sofia Navarro
Barclays Says Markets May Overprice Chances of Near-Term Fed Hikes as Oil Rises

Barclays cautions that investors appear to be tilting toward higher odds of Federal Reserve rate hikes despite recent commodity-driven inflationary pressures. Analyst Jonathan Millar argues that the market is assigning roughly a 25% probability to a 25-basis-point rate increase by December, a stance the bank views as premature without clear, sustained gains in core inflation. Barclays continues to expect the next policy moves will be cuts - contingent on disinflation - while stressing that a longer-than-anticipated pause is the most plausible risk.

Key Points

  • Markets are pricing roughly a 25% probability of a 25-basis-point Fed rate increase by December, which Barclays views as premature without sustained core inflation acceleration - impacts bond and interest-rate sensitive markets.
  • Longer-term inflation expectations are not signaling a persistent pickup: market-implied 5-10 year expectations have drifted lower while the University of Michigan gauge stayed at 3.2% - relevant for inflation-linked securities and real returns.
  • Barclays still expects the next policy direction to be easing, with 25-basis-point cuts forecast for September 2026 and March 2027, conditional on continued disinflation - important for financial sectors and borrowing costs.

Barclays issued a note on Monday suggesting that markets may be misreading how the Federal Reserve will respond to recent commodity price gains tied to geopolitical developments. Analyst Jonathan Millar said investors "continue to boost the weighting of Fed hike scenarios," but he added that "risks of an extended hold are much higher, and we can’t rule out deeper cuts."

The bank highlighted that market pricing currently assigns about a 25% chance to a 25-basis-point rate increase by December, a probability the firm characterized as putting the "cart before horse." Barclays questioned whether such expectations are justified in the absence of evidence that core inflation is accelerating on a sustained basis.

Barclays flagged that longer-term inflation expectations do not appear to be signaling persistent upward pressure. The note observed that "market-implied 5-10yr expectations have drifted lower," and that the University of Michigan's comparable measure "held steady at 3.2%." In addition, the bank noted that nothing in recent Federal Open Market Committee commentary points toward a definitive hawkish shift, with policymakers instead "emphasizing uncertainty and asymmetric risks."

Looking ahead, Barclays reiterated its view that the Fed's next directional move is likely to be easing rather than further tightening. The firm projects 25-basis-point cuts in September 2026 and March 2027, subject to the condition of sustained disinflation. Barclays also expressed skepticism that the FOMC would postpone cuts solely because of higher oil prices, though it said officials would likely want to see evidence that energy prices are stabilizing before acting.

Despite this expectation for easing over the medium term, the bank warned that the most plausible alternative risk remains a more prolonged hold on policy. That scenario could be driven by temporary supply disruptions - such as those affecting commodity markets - or by a loss of confidence among policymakers about the durability of disinflation. Barclays also pointed to a potential downside risk for the labor market if elevated energy costs sap household purchasing power.

Context and implications

The note frames the current market pricing as tilted toward nearer-term tightening even as key inflation indicators and Fed commentary do not yet signal a sustained move higher in core inflation. Barclays' baseline remains eventual easing, but the firm assigns material probability to a longer hold if supply-side shocks continue or if policymakers grow more cautious.

Risks

  • A more prolonged Fed hold remains a plausible risk, driven by temporary supply shocks or reduced policymaker confidence - this would affect fixed-income markets and sectors sensitive to rates.
  • Elevated energy prices could erode household purchasing power and introduce downside risks to the labor market - this would weigh on consumer spending and cyclical sectors.
  • Officials may require evidence that energy prices are stabilizing before moving to cut rates, potentially delaying easing even if broader inflation measures cool - this could extend uncertainty for markets and businesses planning around interest-rate expectations.

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