Investing.com -- Barclays (LON:BARC) strategists expect the Federal Reserve to implement only one rate cut of 25 basis points in 2025, in June, as stronger-than-expected economic data and firm inflation expectations reshape the outlook for US monetary policy.
December labor market data exceeded expectations, with nonfarm payrolls surging by 256,000, far above the consensus estimate of 165,000. Moreover, the unemployment rate edged down to 4.1%, supported by robust household employment growth. Despite slowing average hourly earnings, payroll income rose at an annualized pace of 5.4%, indicating sustained momentum in consumer spending.
“Labor demand appears to be on a firmer trajectory than we had thought,” Barclays strategists led by Jonathan Millar said in a note.
They also point out the mixed inflation signals, which add to the uncertainty of the current environment.
While wage growth appears to be moderating—now below the Fed's 3.0-3.5% threshold for achieving its 2% inflation target—other indicators point to persistent pressures. Notably, the ISM input cost index reached its highest level since early 2023, and household inflation expectations for the next year jumped to 3.3%.
“Given such strong data, we now expect the FOMC to cut rates only once this year, by 25bp in June, bringing the fed funds target range to 4.00-4.25% by year-end,” Barclays stated.
The firm removed a previously forecasted March rate cut, citing expectations for economic activity to slow in the coming quarters while inflation continues to decelerate in the first half of 2025. Inflation is then expected to resurge in the second half, driven by the likely tariffs under the Trump administration.
Overall, financial conditions remain restrictive despite the Fed’s 100-basis-point cuts in 2024. Rising long-term yields and a strengthening dollar have offset the effects of prior rate reductions, supporting Barclays’ view of a gradual monetary easing trajectory.
Looking ahead, the bank foresees the Fed pausing after the June cut, maintaining the federal funds rate at 4.00-4.25% for a year. Additional rate cuts are expected to resume in mid-2026 as inflationary pressures further abate.
“We still think the federal funds rate will end 2026 at 3.25-3.50%, implying an additional cut in December next year,” strategists concluded.