Barclays: Fed Likely to Delay Rate Cuts as Inflation Risks Rise

Barclays has delayed its forecast for the first interest rate cut by the US Federal Reserve due to increasing inflation risks. Markets are reassessing monetary policy prospects due to increasing price pressures and geopolitical risks.

Barclays Expects Fed to Push Back Rate Cuts Due to Inflation Worries

Barclays economists now believe that the U.S. Federal Reserve will delay their first interest rate cut until September 2026. It is due to better-than-expected core inflation data and increasing price pressures fueled by some geopolitical events, such as the war in the Middle East. The increasing rate of inflation, especially for services, is forcing Barclays’ analysts to adjust their forecast to reflect only one 25-basis-point rate cut for the year while delaying subsequent rate cuts to early 2027. Market expectations are also changing as traders are now pricing fewer rate cuts than expected while waiting for clearer signs that inflation is falling back towards the 2% target rate.

Why This Matters?

The timing of interest rate cuts by the Federal Reserve is important as it impacts borrowing, markets, and the economy. Here are key implications:

·       Inflation Remains Stubborn: The core inflation rate, excluding food or energy prices, has persisted above forecasts. It has made it challenging for the Fed to meet its mandate of bringing inflation back down towards a 2% rate.

·       Monetary Policy Uncertainty Rises: The delay in rate cuts suggests that policymakers have a “wait and see” mode. The persistence in inflation data and geopolitical issues might prompt the Fed to delay further rate cuts.

·       Markets Adjust Expectations: Markets have adjusted their expectations for rate cuts in 2026, from expecting multiple rates cuts this year to expecting rate cuts later in the year or in 2027. Which impacts yields, equities, and bond pricing.

·       Borrowing Costs for Consumers and Firms Stay Higher Longer: The delay in rate cuts means that borrowing costs for consumers and firms remain higher for longer, which could affect spending and investment.

·       Geopolitical Risks Influence Policy: Increases in energy prices and inflationary pressures stemming from Middle East tensions are influencing the inflation outlook. Such issues add a layer of complexity to monetary policy decisions.

·       Fed Flexibility Could Affect Growth Trends: By waiting for inflation to sustain a slowdown before cutting interest rates, the Fed is putting price stability first. It could impact economic growth if interest rates remain high.

Fed Policy Outlook Shifts as Inflation Keeps Rates Higher

Barclays’ revised forecast highlights the increased circumspection from economists over the Fed’s rate cut schedule due to high inflation and geopolitical factors. As markets adjust to these revised forecasts, the general public and all relevant stakeholders should be aware that the Fed’s policy rate is likely to remain high for a longer period than expected. It will have a lasting impact on the economy in 2027 and beyond.