US Indices Red on Year, Barclays Foresees Single Fed Rate Cut

In December, labour market data showed a strong performance with nonfarm payrolls increasing by 256,000, significantly surpassing the consensus estimate of 165,000. The unemployment rate also saw a decline to 4.1%, supported by consistent household employment growth. Jonathan Millar, leading Barclays’ strategist team, highlighted that labor demand has proven more robust than initially projected.

The bank now anticipates the Federal Reserve to initiate only one rate cut of 25 basis points in June 2025. This comes amidst shifting dynamics in the U.S. economy, as multiple factors influence the Federal Reserve's monetary policy outlook.

A crucial aspect influencing the Fed's decision-making is wage growth, which is currently moderating and remains below the threshold set by the Federal Reserve, pegged at 3.0-3.5%. Meanwhile, the ISM input cost index has reached its peak since early 2023, indicating rising costs within the manufacturing sector. Additionally, household inflation expectations for the upcoming year have climbed to 3.3%.

Barclays projects that the federal funds target range will settle at 4.00-4.25% by the end of 2025. This projection is based on current trends in long-term yields and a strengthening dollar, which have collectively mitigated the effects of earlier rate cuts.

Following the anticipated rate cut in June 2025, Barclays foresees no further changes in the federal funds rate, with a pause expected at a range of 4.00-4.25% for a year. The bank predicts that additional rate cuts will resume in mid-2026, concluding with a federal funds rate of 3.25-3.50% by the end of 2026. A further rate cut is forecasted for December of that year, reflecting continuous adjustments to accommodate economic conditions.

Leading U.S indices have now turned red on the year, with the Nasdaq 100 down 2.52%, and the S&P 500 down 1.98% through the early days of 2025.