Barclays doubts the Fed will cut as much as currently priced in

Investing.com — Barclays analysts are skeptical that the Federal Reserve will cut interest rates as aggressively as the market currently expects.

In a note Friday, the bank said the Fed’s recent surprise 50 basis point rate cut has spurred positive reactions in risk assets, Barclays believes the projected path of rate reductions seems overly optimistic.

“[The] Fed’s surprise 50bp cut and accompanying message seem clearly designed to pull out all the stops to achieve a soft landing,” Barclays notes.

However, the Fed’s own “new dots” indicate a slower pace of cuts ahead. The central bank forecasts just two additional 25 basis point cuts for the remainder of 2024, followed by four more in 2025. According to Barclays, this contrasts with market pricing, which seems to expect more aggressive easing.

Barclays cautions that incoming economic data could challenge market expectations.

They explain that if the recent strength in U.S. economic indicators persists, the analysts argue that “we doubt the Fed will cut as much as currently priced in.”

In their view, the market may be overly optimistic about the extent of future rate cuts, given that current data suggests the U.S. economy remains resilient.

Despite their skepticism about the pace of rate cuts, Barclays maintains a positive outlook for equities and cyclical stocks in the near term.

“Absent a catalyst to challenge the soft landing script, we believe the path of least resistance for equities and Cyclicals is to the upside,” they write.

The bank notes that historically, equities and cyclical stocks have rebounded after the Fed initiated rate cuts, as long as a recession did not follow.

Barclays emphasizes that the trajectory of rate cuts will depend on economic developments, but for now, they remain cautious about expectations for aggressive easing.