Barclays Questions Whether the Fed Will Cut Rates as Much as Priced In

Barclays analysts express doubts about the Federal Reserve’s likelihood of implementing interest rate cuts as aggressively as the market currently anticipates.

In a report released Friday, the bank acknowledged that the Fed’s unexpected 50 basis point rate cut had led to favorable reactions in risk assets. However, Barclays believes that the expected trajectory of further rate reductions may be overly optimistic.

The analysts noted that the Fed’s recent actions and messages appear to aim for a smooth economic transition, focusing on achieving a soft landing. Yet, the Fed’s updated projections, based on their “new dots,” suggest a slower rate of cuts ahead, with just two more 25 basis point reductions planned for the rest of 2024, followed by four additional cuts in 2025. This outlook contrasts sharply with market expectations, which seem to anticipate more significant easing.

Barclays warns that forthcoming economic data could challenge these market assumptions. The analysts indicate that if the recent strength in U.S. economic indicators continues, it is unlikely the Fed will reduce rates to the extent currently factored in by the market. They argue that the market might be overly optimistic regarding future rate cuts, given the resilience of the U.S. economy reflected in current data.

Despite their skepticism regarding the pace of rate cuts, Barclays holds a positive view on equities and cyclical stocks in the short term. They assert that, barring any events that might undermine the soft landing narrative, the most favorable direction for equities and cyclical stocks is upward. Historically, these asset classes tend to recover after the Fed begins to cut rates, provided a recession does not follow.

In summary, while Barclays acknowledges that future rate cuts will depend on evolving economic conditions, they remain cautious about prevailing expectations for aggressive easing.