Barclays: It is expected that the Federal Reserve will cut interest rates by 25 basis points in March and June next year, and core PCE will rise again in the second half of the year.

Barclays research team published a research report on the Federal Open Market Committee (FOMC) meeting in December, stating that the FOMC lowered the interest rate by 25 basis points and indicated that the pace of future rate cuts would slow down, hinting at a possible pause in rate cuts in January. The Summary of Economic Projections (SEP) shows that there will be two rate cuts in 2025, followed by two more in 2026, with significantly increased inflation expectations and a slightly stronger labor market. Currently, the median is in line with Barclays' expectations. The report stated that, as expected by the market, the FOMC lowered the federal funds rate target range by 25 basis points, bringing rates closer to the neutral level as perceived by the authorities, but conveying an overall hawkish tone through statements, new forecasts, and press conferences. The meeting statement, taking into account additional adjustments in terms of degree and timing, showed that the Fed plans to slow down the pace of rate cuts, and the January meeting may pause the rate cuts. The committee reiterated that it believes the risks to achieving employment and inflation goals are roughly balanced. The new Summary of Economic Projections significantly raised inflation expectations, with the median inflation expectations for core personal consumption expenditures (PCE) rising by 0.3 percentage points to 2.5% in 2025, and by 0.2 percentage points in 2024 and 2026, while inflation risks have significantly increased. Some participants have factored in the impact of increased tariffs into their forecasts, while others have not. At the same time, the Summary of Economic Projections shows that the actual GDP growth and unemployment rate median forecasts for 2024 and 2025 are stronger than in September. The dot plot shows that due to stronger-than-expected inflation, the median for 2025 and 2026 has been raised by 50 basis points. Currently, the median for 2025 is 3.9%, indicating two rate cuts of 25 basis points each next year, followed by two more in 2026, and one in 2027, with the long-term median raised by 0.1 percentage points to 3.0%. At the press conference, Federal Reserve Chairman Powell emphasized that future actions will be more proactive, and whether further rate cuts will be considered will depend on progress in inflation levels and the sustained strength of the labor market. As expected, the FOMC did not make any new announcements regarding the Federal Reserve's balance sheet, and lowered the overnight reverse repurchase agreement (RRP) rate to the minimum of the federal funds rate target range. Barclays maintains its previous benchmark forecast, expecting the FOMC to cut rates only twice next year, in March and June, by 25 basis points each time; it is expected that in the second half of 2025, core PCE inflation levels will rise again due to higher import tariffs and stricter immigration control measures. The bank expects the FOMC to continue rate cuts around mid-2026, with two more rate cuts of 25 basis points each expected that year, adjusting the target rate range to a moderately tight 3.25-3.50%. The median for 2025 and 2026 is currently in line with the forecast.