Zero or two rate cuts this year? The divide between two factions within the Federal Reserve intensifies!

The Federal Reserve is divided, with two major camps: one advocating for no rate cuts and the other for two rate cuts.

On Wednesday, the dot plot released by the Federal Reserve indicated that officials expect two rate cuts of 25 basis points each by the end of the year, but the distribution of the dot plot shows a clear bimodal pattern: among the 19 participants, 7 expect no rate cuts this year, 8 expect two rate cuts, and only a few support one or three rate cuts.

This unprecedented divergence signals a high degree of uncertainty in the Federal Reserve's policy path. According to reports from the trading desk, Barclays analyst Marc Giannoni and his team stated in their latest research report that the dot plot shows that decision-makers are exhibiting an extreme trend of "either no rate cuts or two rate cuts."

Barclays holds a cautious view on the Federal Reserve's policy path, believing it largely depends on the direction of tariff policies. The bank predicts that there may only be one rate cut of 25 basis points in December this year, while three rate cuts may occur in 2026, bringing the interest rate down to a range of 3.25%-3.50%.

Two Camps on the Interest Rate Path: Rate Cuts or Wait-and-See?

Where do the internal divisions within the Federal Reserve come from?

The report points out that the 7 officials supporting no rate cuts are clearly more concerned about inflation risks, while the 8 officials supporting two rate cuts are more focused on the threat of the unemployment rate potentially rising to 4.5% or economic growth slowing to 1.4%. Only 4 participants chose a relatively moderate path of one or three rate cuts.

The Barclays team predicts that the Federal Reserve may only cut rates once by 25 basis points in December this year, as inflation has not yet been fully controlled.

It is worth mentioning that economist Carmen Reinhart has pointed out that the current high inflation is closely related to external shocks (such as tariffs), and if the Federal Reserve relaxes its policies too early, it may lead to a de-anchoring of inflation expectations. This aligns with Powell's emphasis on "maintaining stable long-term inflation expectations," further confirming the necessity of a cautious policy.

Tariff Shock, SEP Shows Stagflation Clouds Looming

The impact of tariff policies on the economy is another major focus of the report.

The report mentions that the latest Summary of Economic Projections (SEP) clearly shows the impact of tariff policies on the U.S. economic outlook.

Compared to the March forecast, FOMC participants have significantly lowered their growth expectations while raising their inflation and unemployment rate forecasts.

The dot plot shows that the 2025 real GDP growth forecast has been revised down by 0.3 percentage points to 1.4%, and the 2026 forecast has been revised down by 0.2 percentage points to 1.6%; PCE inflation forecast has been significantly raised by 0.3 percentage points to 3.0%, and the core PCE inflation forecast has risen to 3.1%. The unemployment rate forecast has also been adjusted upward, expected to reach 4.5% in both 2025 and 2026.

This means that the vast majority of participants believe that inflation risks are skewed to the upside, and unemployment risks are also skewed to the upside, and this combination of "upward inflation and downward growth" is a typical characteristic of stagflation.

Although current inflation expectations have been raised, the FOMC's inflation forecasts for 2026 and 2027 have also seen slight increases, reaching 2.4% and 2.1%, respectively.

The report points out that this indicates that some committee members believe the impact of tariffs may not be temporary but will continue to ferment. A recent report from the International Monetary Fund (IMF) also warned that sustained high tariffs could lead to a restructuring of global supply chains, further exacerbating inflationary pressures.

In response to this stagflation risk, the Barclays team believes that the Federal Reserve may choose to "take it one step at a time," adjusting policies dynamically based on data.

Powell Sends Cautious Signal: Not in a Hurry to Act

At the press conference, Powell conveyed a clear message to the market: the Federal Reserve is not in a hurry to cut interest rates. He mentioned:

"The current policy stance is moderately restrictive, sufficient to address the various risks and uncertainties we face."

At the same time, Powell also clearly expressed concerns about the inflation outlook, bluntly stating that "tariffs may push up prices and drag down economic activity," and he expects price pressures to intensify during the summer, although this process is "complex and highly uncertain."

Powell also emphasized the lagging effect of tariff transmission:

"The goods that retailers are selling today may have been imported months ago, when tariffs were not yet imposed. Many companies expect to pass on some or all of the effective tariffs to the next link in the chain, ultimately passing them on to consumers."

The report states that this statement significantly deviates from his tone in March, when he described the impact of tariffs as "temporary." Powell reiterated the need to keep long-term inflation expectations stable, "to ensure that a one-time increase in price levels does not evolve into a persistent inflation problem."