Barclays doubts the Fed will cut as much as the current price in By Investing.com

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

In a note on Friday, the bank said that while the Fed’s recent surprise 50 basis point interest rate cut had prompted positive reactions to risk assets, Barclays said the projected path of rate cuts appeared too optimistic.

“The (Fed’s) surprise 50 basis point rate cut and accompanying message seem clearly designed to pull out all the stops to achieve a soft landing,” notes Barclays.

However, the Fed’s own “new points” point to a slower pace of tapering going forward. The central bank forecasts just two more cuts of 25 basis points for the rest of 2024, followed by four more in 2025. According to Barclays, this contrasts with market pricing, which appears to expect more aggressive easing.

Barclays warns that the economic data received could challenge market expectations.

They explain that if the recent strength in US economic indicators persists, analysts say “we doubt the Fed will cut as much as the price is currently.”

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

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

“Absent a catalyst to trigger the soft landing scenario, we believe the path of least resistance for equities and cyclicals is up,” they write.

The bank notes that stocks and cyclicals have historically recovered after the Fed initiated interest rate cuts, as long as a recession did not follow.

Barclays points out that the path of interest rate cuts will depend on economic developments, but for now they remain cautious about expectations of an aggressive easing.