Barclays: Cautions on 2025 Rate Cut Outlook Amid Persistent Inflation Concerns

The Federal Reserve’s monetary policy trajectory for 2025 has become increasingly uncertain in the wake of the latest Consumer Price Index (CPI) report, which revealed higher-than-expected inflation.

While many analysts still expect at least one rate cut this year, Barclays has joined a growing list of institutions highlighting the rising probability that the Fed may remain on hold—or even entertain rate hikes—if inflation proves stickier than anticipated.

With markets previously pricing in a more aggressive easing cycle, the recent inflation data has forced investors to reassess their expectations. This article explores Barclays’ latest outlook, the factors shaping the Fed’s decision-making, and what this could mean for markets in the months ahead.

Barclays' View: One Rate Cut, But Growing Risks of No Cuts at All

Barclays maintains its forecast for a single Federal Reserve rate cut in 2025 but warns that the risks of no cuts are increasing. The investment bank points to two key factors driving this shift in sentiment:

1. Persistent Inflation Pressures – The latest CPI report showed headline inflation rising 0.5% month-over-month, bringing the annual rate to 3.0%. Core CPI, which excludes food and energy, climbed 3.3% year-over-year, reinforcing concerns that inflation may not be cooling as quickly as the Fed would like.

2. Resilient Economic Growth – Despite high borrowing costs, the U.S. economy continues to show strong momentum, particularly in the labor market. The unemployment rate remains low, and consumer spending has not weakened significantly, reducing the urgency for immediate policy easing.

Given these conditions, Barclays suggests that while rate cuts are still a possibility, the risks of a prolonged hold—or even discussions of potential hikes—are growing. This echoes recent commentary from Bank of America, which stated that the Fed has “no reason to cut rates” given the current economic backdrop.

A Shifting Market Narrative: Rate Hikes Back in Discussion?

Just a few months ago, the prevailing market expectation was that the Fed would begin cutting rates as early as March or June 2025. However, the latest CPI report has caused a dramatic repricing of rate expectations.

- Futures markets have pushed back the anticipated first cut to September, with only a 50% probability of a move by then.

- Some analysts have even floated the idea of potential rate hikes if inflation remains persistently above target.

- Treasury yields surged following the CPI release, with the 10-year yield rising to 4.64% and the 2-year yield climbing to 4.37%, signaling diminished rate-cut expectations.

Despite this shift, Barclays maintains that monetary easing is still likely in 2025, but they emphasize the need for more clarity on inflation trends before the Fed commits to a definitive policy shift.

What This Means for Investors and the Economy

For financial markets, the Fed’s evolving stance has profound implications across asset classes.

1. Equities: Caution in Interest Rate-Sensitive Sectors

- The delay in rate cuts has pressured high-growth technology stocks, which had previously benefited from lower rate expectations.

- Sectors such as financials, energy, and industrials could benefit in a higher-for-longer rate environment.

2. Fixed Income: Rising Yields and Volatility

- Bond yields have increased as investors adjust to the prospect of fewer rate cuts.

- Short-duration bonds may be more attractive in this environment, as longer-term yields remain elevated.

3. Housing and Consumer Borrowing: Headwinds Persist

- Mortgage rates, which had been declining in anticipation of Fed cuts, may remain elevated, potentially dampening homebuyer demand.

- Consumer borrowing costs for credit cards, auto loans, and personal loans are likely to stay high, impacting discretionary spending.

4. Currency Markets: Dollar Strength Continues

- A delay in rate cuts supports a stronger U.S. dollar, making exports more expensive and impacting multinational earnings.

- Emerging markets that rely on lower U.S. rates for capital inflows could see increased pressure.

Key Data Points to Watch Moving Forward

The Federal Reserve’s decision-making process remains data-dependent, meaning upcoming economic reports will be critical in shaping policy expectations. Investors should closely monitor the following:

- Personal Consumption Expenditures (PCE) Price Index (February 28, 2025): The Fed’s preferred inflation measure, providing further clarity on price pressures.

- March CPI Report (April 10, 2025): If inflation remains elevated, expectations for 2025 rate cuts could diminish further.

- FOMC Meetings (March 19-20, 2025 & June 11-12, 2025): Powell’s commentary and economic projections will offer valuable insights into the Fed’s outlook.

Conclusion: Fed Likely to Stay on Hold for Now, With Uncertainty Ahead

Barclays’ latest assessment underscores the growing uncertainty surrounding the Federal Reserve’s rate path in 2025. While the firm still expects at least one cut this year, persistent inflation and a resilient economy have increased the likelihood that the Fed could maintain its current stance—or even consider rate hikes if necessary.

For investors, this means adjusting strategies to account for a higher-for-longer interest rate environment, focusing on resilient sectors, and preparing for continued market volatility. As the Fed navigates these challenges, the coming months will be crucial in determining whether the long-awaited rate cuts materialize or whether the central bank remains in a prolonged pause.