Barclays economists say U.S. economic indicators are sending mixed messages: activity appeared to slow at the end of last year, yet stronger income and labor measures early in 2026 point to continued resilience. That mix, the bank argues, is likely to keep the Federal Reserve cautious about trimming interest rates in the near term.
In a note outlining the bank's policy outlook, Barclays' team led by Pooja Sriram highlighted revised growth figures that suggest a dampening of demand in the fourth quarter even as household finances and hiring remain supportive of consumption.
Second estimates for fourth-quarter gross domestic product showed growth revised down to an annualized 0.7%. The downgrade reflected weaker contributions from consumer spending and business investment, with consumer spending growth lowered to a 2.0% annualized pace and private domestic final purchases cut to 1.9%.
Despite the softer headline, income data provided a more encouraging picture for near-term activity. Revised labor-income figures lifted third-quarter gross domestic income growth to 3.5%, while disposable personal income increased 0.9% month-on-month in January. Real personal spending, adjusted for inflation, rose 0.1% in January for the second straight month, indicating consumption broadly tracking income gains.
Labor-market measures also remained relatively firm. Job openings climbed to roughly 6.95 million in January and the hiring rate held steady, signaling continued demand for labor that can underpin spending.
Barclays singled out inflation dynamics as the central concern for policy makers. While consumer price index readings appear relatively muted, the bank emphasized that the Federal Reserve's preferred inflation gauge - core Personal Consumption Expenditures - continues to show stronger underlying pressure.
Specifically, core CPI rose 0.22% month-on-month in February, but core PCE inflation printed close to 0.4% for a second consecutive month in January and is expected to record a similar reading for February. That divergence between CPI and core PCE, Barclays said, supports a more cautious approach from the Federal Open Market Committee.
Given the mix of softer growth in late 2025 and persistent underlying inflation, Barclays now expects the FOMC to leave the policy rate unchanged at its upcoming meeting as policymakers await clearer evidence that inflation is converging toward the 2% objective.
The bank adjusted its path for easing, narrowing its 2026 cut schedule to a single 25 basis-point reduction in September, moved back from a prior view of a June cut. The economists also pushed their second anticipated 25 basis-point easing out to March 2027.
Barclays cited elevated core inflation readings and upside risks from higher oil prices and geopolitical uncertainty as reasons for the delay. The bank said the Fed will likely require more convincing signs that underlying inflation is moderating before commencing a series of rate reductions.
Looking ahead to central bank communications, Barclays expects Fed Chair Jerome Powell to underline that further hikes are not the base case while reiterating that cuts remain the central scenario. However, any move toward easing, the economists noted, would probably depend on clearer evidence that inflation has peaked or that labor-market strength is waning.
Impacted sectors and markets
- Interest-rate sensitive sectors such as housing and utilities, which respond to changes in borrowing costs.
- Energy markets, given Barclays' explicit note that higher oil prices present an upside risk to inflation.
- Credit and financial markets, which price Fed path expectations into yields and borrowing spreads.