Barclays Foresees Fed Rate Cut Challenges Amid Persistent Inflation

Understanding the U.S. Interest Rates: Insights from Barclays

Recent analyses by Barclays indicate that the potential for sustained high U.S. interest rates is significantly influenced by the country's inflation policy. This reflection stems from observations made during the December meeting of the Federal Open Market Committee (FOMC), where participants began integrating tariff expectations into their inflation forecasts.

Impact of Tariffs on Inflation Forecasts

Notably, not all committee members modified their official predictions; however, there was a consensus among many that the risks associated with inflation are now leaning towards the upside. This shift suggests an increasing concern within the economic landscape regarding inflationary pressures.

Chair Jerome Powell's Viewpoint

While Federal Reserve Chair Jerome Powell did not provide explicit remarks on how tariffs are viewed in the context of the Federal Reserve's objectives, Barclays' report elucidates the implications of anticipated inflation spikes. These spikes, expected in the latter half of 2025, are particularly relevant in the context of the rising inflation rates experienced in recent years.

The Future of U.S. Rate Cuts

According to Barclays, the anticipated inflation caused by tariffs will likely hinder the Fed's capacity to lower interest rates further. They predict that there will be a pause in rate cuts after June 2024, with a potential resumption around mid-2026 when the inflationary effects of the tariffs are expected to dissipate.

Forecasted Rate Cuts

As part of their baseline forecast, Barclays anticipates two rate cuts of 25 basis points each occurring in 2026. This forecast leads to a projected terminal rate ranging between 3.25% to 3.50%.

Conclusion

The interplay between tariffs, inflation, and interest rates represents a crucial aspect of economic policy that will define the U.S. economic landscape over the next few years. Stakeholders and analysts will need to monitor these developments closely as the situation evolves.