Barclays’ Rate Cut Predictions
Barclays anticipates the Federal Reserve will cut rates twice in 2025, in September and December. This prediction follows remarks by Powell, which indicated a potential easing trend, as risks to full employment gain importance.
The strategy involves rate reductions in 25 basis point steps, scheduled quarterly, with further decreases expected in March and June 2026. By late 2026, this would position rates between 3.25% and 3.50%.
Additionally, Barclays has cautioned about a 50% likelihood of a U.S. recession under Trump. Their projections include a slowdown in job growth, an increase in unemployment to 4.2%, and Fed rate cuts aligning with economic softening.
Despite these projections, the threshold for action in September is set high. A robust August jobs report may result in the Fed maintaining its current stance.
Jackson Hole Implications
Given the recent signals from Jackson Hole, we now see a path for the Federal Reserve to begin cutting rates, starting with a 25 basis point move in September. The Fed’s focus is clearly expanding to include the growing risks to the labor market. Market pricing has shifted accordingly, with futures now implying over a 60% chance of a cut at the next meeting, up from just 30% a month ago.
The deciding factor for the September meeting will be the August jobs report, due out in early September. After July’s report showed job growth slowing to a more moderate 175,000, another number below 150,000 would almost certainly confirm the Fed’s pre-emptive cut. However, a surprise print above 200,000 could cause the Fed to pause, creating significant uncertainty.
In the coming weeks, traders should consider positioning for lower short-term rates, perhaps through buying SOFR futures or looking at options that profit from a rate cut. The elevated uncertainty around the jobs data suggests that implied volatility will be high, so trades that benefit from this, like straddles on Treasury options, could be effective. This allows profiting from a large market move in either direction following the data release.
Looking back, this situation feels similar to the mid-1995 cycle, where the Fed successfully engineered a soft landing with a series of pre-emptive cuts. We see the yield curve beginning to steepen as front-end rates fall in anticipation of cuts while longer-term rates remain more anchored. This suggests trades that benefit from a widening spread between 2-year and 10-year Treasury yields could be profitable.
The political landscape adds another layer of risk, with a 50% chance of a recession being discussed in the event of a Trump presidency. This potential for a sharper economic slowdown means holding some longer-term defensive positions makes sense. This could include buying far-dated put options on equity indices or holding longer-duration bonds as a hedge against a future downturn.
