Recently, the research team at Barclays Bank released their latest report on the Federal Reserve's monetary policy. They anticipate that the Federal Reserve will announce a 25 basis point reduction in the federal funds rate target range at the December FOMC (Federal Open Market Committee) meeting and will then signal a more gradual approach to rate cuts. The bank expects Federal Reserve Chairman Powell to emphasize, following the meeting, that the Fed will take a more moderate and neutral policy stance to ensure sustainable economic growth.
Barclays analysts believe the Federal Reserve will highlight the robust growth of the US economy, a labor market near full employment, and balanced risks between inflation and employment at this meeting. This statement indicates that the Federal Reserve will pursue a gradual rate-cut strategy rather than rushing into significant rate cuts. Barclays predicts that in the December statement, the Fed will further clarify that the committee will gradually transition to a more neutral and balanced policy stance to ensure future economic policy stability.
According to Barclays' forecast, the Federal Reserve will announce in its December policy statement that the federal funds rate target range will be cut to 4.25%-4.50%. This adjustment will bring the rate close to the "neutral" level perceived by the Fed, aligning with prior public statements from Fed officials during the "quiet period" and closely matching market expectations. The market had widely anticipated further rate cuts from the Fed within the year, especially as inflationary pressures have eased somewhat.
Barclays also expects that in the December Economic Projections Summary, the Federal Reserve will raise its US GDP growth forecast, projecting steady economic growth for 2024. Meanwhile, the unemployment rate forecast may be revised down, while the inflation level is expected to stay near the target range. Despite relatively stable economic growth, Barclays believes the Federal Reserve still needs to be flexible in responding to potential risks, particularly considering the impacts of global economic changes and US domestic demand.
Additionally, Barclays predicts that the Federal Reserve's dot plot will indicate a median federal funds rate of 3.6% for 2025, suggesting there may be three 25-basis-point rate cuts next year, although the exact number of cuts remains uncertain. The bank believes that despite the possibility of future rate cuts, the Fed's rate reductions in 2025 are unlikely to exceed two times. Barclays also foresees that in 2026, the Fed may cut rates twice more, each by 25 basis points, and by 2027, the federal funds rate could potentially be reduced once again.
Overall, Barclays' baseline forecast suggests that despite ongoing US economic growth, the Federal Reserve will continue to adopt gradual rate-cut measures to ensure a transition to a more neutral policy environment, while creating conditions for long-term economic stability. This also means the Fed will maintain a relatively cautious policy stance in the coming years.
