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

Federal Reserve Chair Jerome Powell, speaking at Jackson Hole, signaled a more dovish stance, opening the door to potential interest rate cuts as early as September, citing rising downside risks to employment despite lingering inflation concerns from tariffs. This shift led investors to fully price in a 25-basis-point reduction at the September FOMC meeting, driving significant rallies across major U.S. equity indices, with the Dow Jones Industrial Average gaining 1.89%. Analysts like Barclays have consequently revised forecasts, now anticipating two 25-basis-point cuts this year, though a strong August jobs report could still influence the timing.

Analysis

Federal Reserve Chair Jerome Powell's remarks at the Jackson Hole conference signaled a notable dovish pivot, explicitly opening the door for a potential interest rate cut as soon as the September FOMC meeting. This shift is predicated on a rebalancing of risks, with rising concerns over a cooling labor market and potential downside risks to employment now taking precedence over lingering inflation threats. The market reaction was immediate and significant, with futures contracts moving to fully price in a 25-basis-point reduction in September and major U.S. equity indices rallying sharply; the Dow Jones Industrial Average, for instance, surged 1.89% to a record high. This sentiment shift prompted Wall Street analysts, including Barclays, to revise their forecasts to include two 25-basis-point cuts before year-end. However, Powell's guidance was conditional, emphasizing that the central bank can "proceed carefully" and that no decision has been made. The upcoming September 5 employment report is now a critical data point, as a strong labor market print could still persuade the Fed to remain on hold, making it the key determinant for the next policy move.

Key Decisions for Investors

• The Fed's dovish pivot provides a clear tailwind for risk assets, justifying a constructive stance on broad U.S. equity indices which demonstrated significant immediate upside following Powell's comments.
• The upcoming September 5 employment report is now the most critical near-term catalyst; a stronger-than-expected jobs number could challenge the market's consensus for a September rate cut, warranting caution ahead of the release.
• Investors should re-evaluate positions in rate-sensitive sectors, as the revised outlook for two rate cuts this year could benefit growth stocks and industries that have been under pressure from higher borrowing costs.
• Given that futures markets have fully priced in a September cut, any deviation from this expectation will likely trigger significant market volatility, placing a premium on monitoring Fed communications and incoming economic data.