Barclays: Inflation Remains Elevated, Federal Reserve to Keep Rates Unchanged, First Rate Cut Expected in September

Investing.com - U.S. economic data send mixed signals. Demand was weak at the end of last year but showed signs of resilience early in 2026, while persistent inflation may cause the Federal Reserve to remain cautious about easing policies, Barclays says.

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The bank states that the latest data show growth slowed at the start of the year, despite stronger household income and labor market indicators continuing to support consumer spending.

Barclays Chief Economist Pooja Sriram said in a report: “Recent GDP and spending data show weak demand in the fourth quarter, but stronger income in January indicates economic activity is resilient.”

The second estimate shows U.S. Q4 GDP growth was revised down to an annualized 0.7%, reflecting weakening consumer spending and business investment. Consumer spending growth was revised down to an annualized 2.0%, and private domestic final purchases were lowered to 1.9%.

Despite soft demand, income data provides more supportive signals for the outlook. Revised labor income estimates raise Q3 GDP growth to 3.5%, and disposable income in January increased 0.9% month-over-month.

After inflation adjustment, real personal spending in January rose for the second consecutive month by 0.1%, indicating consumer activity remains roughly aligned with income trends. Meanwhile, labor market indicators remain solid, with job openings in January rising to about 6.95 million, and hiring rates staying stable.

Economists believe inflation dynamics remain a key challenge for policymakers. Although Consumer Price Index (CPI) data are relatively moderate, core Personal Consumption Expenditures (PCE)—the Fed’s preferred indicator—continues to show stronger underlying pressure.

Economists note: “Despite soft CPI, core PCE inflation remains elevated.” In February, core CPI rose 0.22% month-over-month, but January’s core PCE inflation rate was close to 0.4% for the second month in a row, with similar readings expected for February.

Therefore, Barclays expects the Federal Open Market Committee (FOMC) to keep rates unchanged at next week’s meeting, with policymakers waiting for clearer evidence that inflation is returning to the 2% target.

Economists wrote: “We have revised our Fed forecast to only one 25 basis point rate cut in 2026, in September (previously June), and delayed the second 25 basis point cut to March 2027.”

The delay reflects high core inflation and upside risks related to rising oil prices and geopolitical uncertainties. Barclays expects the Fed will need more evidence that underlying inflation is easing before beginning to loosen policy.

Economists anticipate Fed Chair Jerome Powell will emphasize that rate hikes are not the baseline scenario and reaffirm that further rate cuts remain central, although easing may require clearer signs that inflation has peaked or that the labor market is softening.

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