Is the Federal Reserve turning hawkish? Barclays: Powell aims to "break the inevitable expectation of a rate cut", and the data supports more rate cuts

The market's "hawkish" interpretation of the latest remarks made by Federal Reserve Chair Powell might be a misjudgment. Barclays believes that what Powell truly wants to do is to correct the market's overconfidence that a rate cut is a foregone conclusion.

After the FOMC meeting in October, the chairperson of the Federal Reserve stated at a press conference that inflation still faces upward pressure in the short term and employment is confronted with downward risks. The current situation is quite challenging. The committee still has significant differences of opinion on whether to cut interest rates again in December, and a rate cut is not a certainty. The market gave this statement a hawkish interpretation. The 2-year US Treasury bonds were sold off, yields rose sharply, and US stocks fell.

On October 31, according to the Chase Wind Trading Desk, Barclays Bank raised a clear objection in its latest research report, arguing that the market's panic might be a misjudgment. Powell's true intention is not to turn hawkish but to manage the market's overly "certain" expectations of interest rate cuts.

The team of Anshul Pradhan, an analyst at the bank, believes that this is a communication strategy aimed at breaking the market's assumption that interest rate cuts are a certainty regardless of the data. The latest economic data shows that the demand for labor continues to slow down and the potential inflation level is not far from the 2% target. All these support the Federal Reserve to continue cutting interest rates.

Barclays pointed out in its research report that the current market pricing is overly hawkish and fails to fully reflect the risk that the labor market may weaken significantly and that the new chair of the Federal Reserve may adopt a more dovish stance.

It's not a hawkish shift, but rather a break from the market's "established conclusions".

Barclays noted in its report: "We believe that the main motivation is to refute the market's assumption that a rate cut in December is a foregone conclusion, rather than a hawkish shift in the Fed's approach to data."

In other words, the Federal Reserve hopes to reaffirm that its decisions are based on data rather than being held hostage by market expectations. Powell made it clear that the Federal Reserve will respond to the slowdown in labor demand, and this is precisely the fact that is happening.

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

In the labor market, leading indicators including Indeed job openings and the labor balance (jobs plentiful vs hard to get) suggest that demand is slowing.

In terms of 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 core PCE inflation based on the market foundation has approached the 2% target.

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

This means that, in the current data context, restrictive monetary policies are no longer necessary. Barclays has observed that the market currently only prices in a cumulative 55 basis point rate cut by June 2026, a view that is "too one-sided".

The current market expects a rate cut of only 35 basis points by March 2026 and only 55 basis points to 3.3% by June. The implicit distribution in the options market indicates that there is a divergence in the number of interest rate cuts in March and June, with a modal expectation of only one cut by June.

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