Barclays: Powell aims to "break the inevitable rate cut expectations," and the data supports more rate cuts.

Written by: Dong Jing, Wall Street Watch

The market's “hawkish” interpretation of the latest remarks by Federal Reserve Chairman Powell may be a misjudgment. Barclays believes that what Powell really wants to do is correct the market's excessive confidence that “rate cuts are a done deal.”

After the October FOMC meeting, the Federal Reserve Chairman stated at a press conference that inflation still faces upward pressure in the short term, employment is at risk of declining, and the current situation is quite challenging. There is still significant disagreement within the committee regarding whether to cut interest rates again in December, and a rate cut is not a foregone conclusion. The market interpreted these remarks as hawkish, leading to a sell-off in 2-year U.S. Treasuries and a substantial rise in yields, while U.S. stocks declined.

On October 31, according to news from the Chasing Wind Trading Platform, Barclays Bank raised a strong objection in its latest research report, arguing that the market's panic may be a misjudgment, and that Powell's true intention is not to shift towards a hawkish stance, but to manage the market's overly “certain” expectations for interest rate cuts.

The analysts from Anshul Pradhan's team believe that this is a communication strategy aimed at breaking the market's assumption that interest rate cuts are a done deal regardless of the data. The latest economic data show that labor demand continues to weaken, and the potential inflation level is not far from the 2% target, all of which support the Federal Reserve's continued rate cuts.

Barclays pointed out in its research report that the current market pricing is overly hawkish and fails to adequately reflect the potential significant weakening of the labor market, as well as the risk that the new Federal Reserve chairman may adopt a more dovish stance.

It is not a hawkish shift, but rather a breaking of the market “conclusion”.

Barclays pointed out in the report: “We believe that its main motivation is to counter the market's assumption that a December rate cut is a foregone conclusion, rather than a hawkish shift in the Federal Reserve's response to the data.”

In other words, the Federal Reserve wants to reiterate that its decisions are based on data rather than being held hostage by market expectations. Powell clearly stated that the Federal Reserve will respond to the slowdown in labor demand, which is exactly what is happening.

The report emphasizes that the latest economic data not only does not support a hawkish stance but also provides a basis for further interest rate cuts.

In terms of the labor market, leading indicators including Indeed job postings and labor gaps (jobs plentiful vs hard to get) indicate that demand is slowing down.

Regarding inflation, Powell also acknowledged the recent weak data. Core inflation indicators have shown a downward trend. Barclays analysis suggests that once the impact of tariffs is excluded, the market-based core PCE inflation is close to the 2% target.

“Overall, if potential inflation is only slightly above the target by a few tenths of a percentage point, and the unemployment rate is only slightly above the natural rate of unemployment (NAIRU) by a few tenths of a percentage point, then the policy setting should be neutral.”

This means that, in the current data context, restrictive monetary policy is no longer necessary. Barclays observes that the market is currently only pricing in a cumulative 55 basis points of interest rate cuts by June 2026, and this view is “too one-sided.”

Current market expectations indicate a rate cut of only 35 basis points by March 2026, and a further cut of only 55 basis points to 3.3% by June. The implied distribution in the options market shows a divergence in market expectations regarding the number of rate cuts in March and June, with the modal expectation being that there will be only one rate cut by June.