Barclays has updated its forecast, now expecting the U.S. Federal Reserve to begin cutting interest rates in September 2026, a notable delay of about four and a half months from its prior projection.
This change in outlook didn't happen in a vacuum; it's a response to a complex mix of recent economic signals. The core reason for the delay is that the path to taming inflation has become more challenging. There are three main drivers behind this cautious stance.
First, inflation is still too high. While the latest Consumer Price Index (CPI) for February showed some progress, with year-over-year inflation at 2.4%, it's not yet at the Fed's 2% target. More importantly, the Fed's preferred inflation gauge, Core PCE, was last reported at 3.0%. Fed Chair Powell himself noted there had been "no progress" on this 12-month measure, making it difficult to justify imminent rate cuts.
Second, a new geopolitical shock is fanning inflation fears. The conflict between the U.S. and Iran has caused a surge in oil prices, with Brent crude briefly topping $100 per barrel. This is a classic 'stagflationary' risk—it can slow economic growth while simultaneously pushing up headline inflation. For the Fed, this raises the risk that inflation could re-accelerate, compelling them to adopt a "wait and see" approach for longer.
Third, while the labor market is cooling, it isn't collapsing. The February jobs report showed a surprising drop of 92,000 payrolls, but the two-month average still shows slight job growth. This softening is a welcome sign for the Fed, but it's not weak enough to force an immediate policy pivot. The mixed signals give officials the flexibility to prioritize the inflation fight without fearing an imminent recession.
Ultimately, Barclays' updated call reflects a broader shift in market expectations. The combination of sticky core inflation and a fresh energy price shock has overshadowed the early signs of a weaker labor market. This suggests the Fed will maintain its patient, data-dependent stance, waiting until the inflation data is convincingly on a path back to 2% before beginning to ease policy.
- Glossary -
- Core PCE Inflation: The Federal Reserve's preferred measure of inflation. It tracks the prices of goods and services purchased by consumers, excluding the volatile food and energy sectors, to get a clearer picture of underlying inflation trends.
- FOMC (Federal Open Market Committee): The committee within the Federal Reserve that is responsible for making key decisions about interest rates and the growth of the U.S. money supply.
- Headline Inflation: A measure of the total inflation within an economy, including commodities such as food and energy prices, which tend to be much more volatile and prone to price spikes.