Barclays, BNP Pivot Toward September Fed Rate Cut
In a significant shift, Barclays and BNP Paribas now anticipate the U.S. Federal Reserve will implement a 25-basis-point Fed rate cut in September 2025. This adjustment follows Chair Jerome Powell’s remarks at the Jackson Hole symposium, where he highlighted growing risks to the U.S. labor market.
Barclays economists, led by Jonathan Millar, revised their forecast by pulling forward a previously expected cut from September 2026 to September 2025. They noted Powell’s tone had introduced “an easing bias,” raising the likelihood of rate cuts sooner than expected. Barclays now expects two 25-bp cuts this year—one in September and another in December.
BNP Paribas, which had long argued that the Fed would remain on hold, also reversed its stance. The bank now forecasts two rate cuts—one in September and another in December—pointing to Powell’s emphasis on the need for fine-tuning policy in response to labor risks.
Powell’s Warning on Labor Market Risks
During his Jackson Hole speech, Powell underscored the unusual shift in the Fed’s reaction function. Traditionally, inflation control has been at the forefront of monetary policy. However, Powell stressed that downside risks to employment are rising and require closer monitoring.
“This unusual situation suggests that downside risks to employment are rising,” Powell said. He added that these risks could materialize quickly in the form of layoffs and rising unemployment.
By emphasizing the labor market, Powell effectively signaled that the Fed is prepared to cut rates if economic data points to worsening job conditions. This has been interpreted as an acknowledgment that the central bank must balance inflation management with employment stability.
Market Expectations for a September Fed Rate Cut
Markets reacted swiftly to Powell’s comments. According to the CME FedWatch Tool, traders now assign an 87% probability of a September Fed rate cut, compared to 75% before Powell’s speech.
Deutsche Bank also revised its outlook, now projecting two rate cuts in 2025, with reductions expected in September and December. Previously, the bank had forecasted only a December cut.
This growing consensus among major financial institutions reflects a significant recalibration of expectations. The Federal Open Market Committee (FOMC) is scheduled to meet on September 16–17, where the decision will be finalized.
Why a Fed Rate Cut Matters for the Economy
The implications of a September Fed rate cut are broad:
Consumer Spending: Lower rates could reduce borrowing costs, encouraging household spending and supporting economic growth.
Business Investment: Cheaper credit could stimulate corporate investments and expansion.
Housing Market: Mortgage rates may fall, making homes more affordable for buyers.
Labor Market Protection: By acting preemptively, the Fed aims to prevent a potential surge in unemployment.
However, risks remain. Some analysts caution that cutting rates too soon may fuel inflationary pressures, especially if the economy rebounds more strongly than expected.
The Fed’s Balancing Act
Powell’s remarks illustrate the delicate balancing act facing the central bank. With inflation moderating but employment risks rising, the Fed must carefully navigate its policy path to avoid either stifling growth or fueling inflation.
The shift in outlook from Barclays, BNP Paribas, and Deutsche Bank underscores that the Fed is increasingly likely to pursue an early rate cut strategy. As September approaches, markets and policymakers will closely monitor economic data, especially job market trends, to assess whether Powell’s concerns materialize.
Conclusion
The September Fed rate cut is now seen as highly probable by markets and major global banks. Powell’s pivot at Jackson Hole has placed labor market risks at the center of the Fed’s policy decisions, signaling that the central bank may ease sooner to safeguard employment.
With markets already pricing in the move, attention will now turn to the upcoming FOMC meeting in mid-September, where the Fed’s decision will confirm whether Powell’s caution translates into action.
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