Investing.com -- Markets may be misreading the Federal Reserve’s reaction function as the current geopolitical climate lifts commodity prices, according to a note from Barclays on Monday.

Analyst Jonathan Millar wrote that investors “continue to boost the weighting of Fed hike scenarios,” but argued that “risks of an extended hold are much higher, and we can’t rule out deeper cuts.”

Barclays noted markets are assigning roughly 25% odds to a 25-basis-point rate increase by December, a pricing the firm described as putting the “cart before horse.”

Despite supply shocks tied to the Middle East conflict, the bank said it doubts rate hikes are the most likely risk scenario without “evidence of a sustained acceleration in core prices.”

Millar wrote that longer-term inflation expectations are not flashing warning signs. The bank noted that “market-implied 5-10yr expectations have drifted lower,” while the University of Michigan’s comparable gauge “held steady at 3.2%.”

Barclays added that nothing from recent Federal Open Market Committee commentary suggests a hawkish pivot is forming, with policymakers “emphasizing uncertainty and asymmetric risks.”

The firm continues to expect the Fed’s next move to be a resumption of easing, projecting 25-basis-point cuts in September 2026 and March 2027, contingent on sustained disinflation.

Barclays “doubt[s] the FOMC would delay cuts solely because of elevated oil prices,” though officials would likely want evidence that energy prices are stabilizing.

However, the bank warned that the most plausible risk scenario remains a more prolonged hold, driven by temporary supply disruptions or diminished policymaker confidence. It also flagged potential downside risks to the labor market if higher energy prices erode household purchasing power.