Barclays has pushed back its forecast for when the Federal Reserve will begin reducing interest rates, now expecting the first cut to arrive in September rather than June. The bank also trimmed the overall pace of easing this year, projecting a single 25-basis-point reduction that would lower the policy range to 3.25%-3.50% in September, with a second 25-basis-point cut moved out to March 2027 from an earlier December timeline.
The revised outlook is driven by an upward revision to Personal Consumption Expenditures, or PCE, inflation projections and by greater upside risks to headline inflation stemming from the conflict in Iran. Barclays cites a recent pattern of resilient core inflation prints as a key factor supporting the delay.
Specifically, core PCE inflation rose 0.36% month-over-month in January. Barclays notes Consumer Price Index details that suggest another strong monthly print of 0.45% in February. On a year-over-year, Q4-over-Q4 basis, the bank now forecasts core PCE at 2.8% for this year - a tenth of a percentage point above what Barclays expects the median of the Federal Reserve's Summary of Economic Projections will report.
Barclays highlights the impact of surging oil prices amid the Iran conflict in lifting headline inflation forecasts. The bank now sees headline PCE inflation peaking at 3.4% year-over-year in the second quarter and remaining above 3% for the remainder of the year. Barclays notes that West Texas Intermediate futures imply only a partial reversal of these oil price increases by year-end.
Despite the stronger headline readings, Barclays expects the Federal Open Market Committee to largely look through rising headline inflation and not to raise policy rates this year. At the same time, the bank stresses that committee members may find it challenging to develop sufficient confidence that underlying inflation is returning to the 2% target until there is more concrete evidence of moderation in core inflation.
On labor market dynamics, Barclays expects payroll employment gains to remain low, with the unemployment rate moving sideways initially before a gradual decline takes hold. Those employment projections form part of the bank's assessment of the likely path for policy and the timing of rate reductions.
Context and implications
- Barclays now expects only one 25-basis-point Fed cut in 2026 - to 3.25%-3.50% in September - and a second 25-basis-point cut in March 2027, delayed from December.
- The bank raised its core PCE forecast to 2.8% on a Q4/Q4 basis for the year, placing it 0.1 percentage point above what it expects the median SEP to show.
- Surging oil amid the Iran conflict lifts headline PCE to a projected 3.4% y/y in Q2 and keeps it above 3% for the rest of the year, with WTI futures signaling only partial oil-price retracement through year-end.