Barclays Strategists: Federal Reserve to Adjust Approach in Response to Recent Economic Data, But No Aggressive Shift Expected
In a note released on Monday, Barclays strategists revealed their insights on the Federal Reserve's upcoming actions in light of the latest economic data. Despite a slowdown in job growth, decreased aggregate hours, and a higher unemployment rate, the investment bank remains optimistic about the underlying strength of the U.S. economy.
Key indicators such as domestic final sales, retail sales, and personal income continue to show resilience, indicating that the economy is not teetering on the edge of a recession. While acknowledging that the Fed may have considered easing in July if they had known about the recent job report earlier, the strategists point out that the bond market has already responded positively, with 10-year yields rallying by 40 basis points.
Looking ahead, Barclays emphasizes the significance of upcoming data releases, including two Consumer Price Index (CPI) reports and another payroll report before the September Federal Open Market Committee (FOMC) meeting. The bank does not anticipate any drastic intra-meeting cuts by the Fed, as such a move would be deemed highly irregular unless there is an imminent financial crisis.
Despite market expectations of a 50-basis point cut in September, with some options suggesting even larger cuts by year-end, Barclays holds a more cautious stance. The bank predicts that the Fed will proceed gradually, cutting 25 basis points at each meeting starting in September, totaling 75 basis points by the end of the year.
In the face of the weak jobs report, the market has already priced in significant cuts, but Barclays believes that Fed officials will rely on incoming data to guide their decisions. The strategists expect the Fed to refrain from pushing back on current market pricing this week, instead letting economic indicators dictate their next moves.
In conclusion, while the recent economic data may suggest some challenges ahead, Barclays remains optimistic about the U.S. economy's overall resilience. The Fed's approach to monetary policy adjustments will be crucial in the coming months, but a gradual and cautious approach is expected. Investors should keep a close eye on upcoming data releases and Fed statements to gauge the future direction of the economy and financial markets.