Federal Reserve turns hawkish? Barclays: Powell aims to "break the inevitable rate cut expectations," and data supports more rate cuts

The market's "hawkish" interpretation of Federal Reserve Chairman Jerome Powell's latest statements may be a misjudgment. Barclays believes that what Powell truly intends to do is correct the market's excessive confidence that "interest rate cuts are a foregone conclusion."

After the October FOMC meeting, the Federal Reserve Chairman stated at a press conference that inflation still faces upward pressure in the short term, employment is at risk of decline, and the current situation is quite challenging. There is still significant disagreement within the committee about whether to cut rates again in December, and a rate cut is not a certainty. The market interpreted these remarks as hawkish, leading to a sell-off in 2-year U.S. Treasury bonds, with yields rising sharply, and a decline in U.S. stocks.

On October 31, according to news from the Wind Trading Desk, Barclays Bank presented a stark opposing view in its latest research report, believing that the market's panic may be a misjudgment, and Powell's true intention is not to shift to a hawkish stance, but to manage the market's overly "certain" expectations of rate cuts.

The analyst team led by Anshul Pradhan at Barclays believes that this is a communication strategy aimed at breaking the market's assumption that rate cuts are a foregone conclusion regardless of the data. The latest economic data shows that labor demand continues to slow, and the underlying inflation level is not far from the 2% target, all of which support the Fed's continued rate cuts.

Barclays pointed out in its report that the current market pricing is overly hawkish and fails to adequately reflect the risk of a significant weakening in the labor market, as well as the possibility that the new Federal Reserve Chairman may adopt a more dovish stance.

Not a hawkish shift, but breaking the market's "conclusion"

Barclays stated in the report: "We believe 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 response to the data."

In other words, the Federal Reserve wants to reaffirm that its decisions rely on data rather than being bound by market expectations. Powell clearly stated that the Fed will respond to the slowdown in labor demand, which is precisely what is happening.

The report emphasizes that the latest economic data not only does not support a hawkish stance but rather provides a basis for further rate cuts.

• In terms of the labor market, leading indicators, including job postings on Indeed and the labor gap (jobs plentiful vs hard to get), indicate that demand is slowing.

• Regarding 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 market's underlying core PCE inflation is close to the 2% target.

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

This means that under the current data context, restrictive monetary policy is no longer necessary. Barclays observed that the market is currently only pricing in a cumulative 55 basis points of rate cuts by June 2026, and this view is 'too one-sided.'

Current market expectations indicate only a 35 basis point rate cut by March 2026 and a 55 basis point cut to 3.3% by June. The implied distribution in the options market shows that there is disagreement in the market regarding the number of rate cuts in March and June, with the modal expectation being only one rate cut by June