Barclays now sees two Fed cuts this year, says jumbo Fed cuts ’very unlikely’

Investing.com -- Federal Reserve Chair Jerome Powell on Friday signaled that an interest rate cut could come as soon as next month, balancing concerns over a cooling labor market with lingering risks from inflation.

Speaking at the Fed’s annual Jackson Hole conference, Powell emphasized that no decision had yet been made but said the “shifting balance of risks may warrant adjusting our policy stance.” His remarks carried less certainty than last year’s signal of forthcoming cuts, but investors swiftly raised bets on a September move.

"Fed Chair Powell’s comments at Jackson Hole were more dovish than we and markets were expecting," BofA economist Aditya Bhave wrote in a note.

Futures markets now fully price in a quarter-point reduction at the Sept. 16-17 meeting, with several Wall Street analysts revising forecasts to expect two cuts totaling half a percentage point before year-end. The federal funds rate currently stands at 4.25%-4.50%.

“The stability of the unemployment rate and other labor market measures allows us to proceed carefully,” Powell told international economists and policymakers.

But he cautioned that “downside risks to employment are rising” as both supply and demand for workers slow, warning that job losses could escalate quickly if conditions deteriorate.

On inflation, Powell said tariffs are expected to push prices higher but described the effect as likely temporary. Still, he added that tariffs “could spur a more lasting inflation dynamic,” a risk that must be “assessed and managed.”

"Powell was clearly spooked by the downward revisions to payrolls, as there haven’t been other major dovish developments since his hawkish July presser," Bhave added.

All in all, Powell’s comments put added focus on the next employment report, which is due September 5. In the meantime, risk assets are likely to be supported by Powell’s most recent comments.

U.S. stocks rallied on Friday with the Dow Jones Industrial Average adding 846 points, or 1.89%, to a record close of 45,631.74.

The S&P 500 gained 1.52% to finish at 6,466.91, just shy of its all-time high, while the NASDAQ Composite rose 1.88% to 21,496.53.

Barclays (LON:BARC) now sees two Fed cuts this year

Powell is signaling an easing bias, with risks to full employment now taking priority as the central bank weighs policy adjustments, according to Barclays U.S. economist Marc Giannoni.

Giannoni says that Powell’s comments at Jackson Hole suggest the Fed is leaning toward preemptive cuts in September, a view that moderate FOMC members are likely to support.

“We think the contingent of moderate board voters is likely to go along with his assessment, which should be enough to carry the FOMC vote,” he wrote.

However, Powell also emphasized the stability of unemployment allows the Fed to move carefully, implying cuts would come in 25-basis-point steps at quarterly intervals.

As a result, Barclays revised its rate outlook, now expecting two 25-basis-point cuts this year, in September and December, followed by two more in March and June 2026.

"Although the bar not to cut is high, we think that paths to a September hold remain in play and that sequential or jumbo cuts are unlikely," Giannoni wrote.

The bank pulled forward its previous September 2026 forecast to this year. By late 2026, Barclays expects the federal funds rate to be held at 3.25%-3.50%, slightly above the estimated neutral range of 3.00%-3.25%.

Barclays also said that a strong August jobs report could still keep the Fed on hold. An unemployment rate dropping to 4.0%-4.1% alongside firm monthly core inflation of at least 0.4% could provide the bar for no move in September.

For BofA’s Bhave, an employment rate of 4.2% in August, with 70k+ job growth "and minimally negative/positive revisions, could keep a hold in play."