Investing.com -- Barclays revised its U.S. economic and Federal Reserve outlook following a sharp de-escalation in the trade conflict with China, no longer expecting a recession in 2025 and projecting fewer interest rate cuts than previously forecast.
In a note released Tuesday, Barclays said that “we expect a less significant jump in inflation and no recession,” after U.S.-China negotiations over the weekend resulted in major tariff reductions.
The U.S. trade-weighted tariff rate on China is now estimated to drop from 155% to about 40%, while China’s tariffs on U.S. goods will be reduced by similar magnitudes.
Barclays expects these lower rates to remain in place “throughout the medium term.”
As a result, Barclays now forecasts just one 25 basis point rate cut by the Federal Reserve this year, in December, down from a previous call for two cuts.
“We no longer think that the FOMC will see enough deterioration in labor market conditions to cut in the next few months,” the bank wrote, adding that inflationary pressures should ease. The forecast for core PCE inflation in 2025 has been revised down to 3.3% from 3.8%.
Barclays also lifted its GDP outlook. “Our baseline no longer features the mild H2 2025 recession we had been penciling into our forecasts,” the analysts wrote.
The bank now expects GDP growth of 0.5% in 2025 and 1.5% in 2026 on a Q4-over-Q4 basis. Payroll employment is expected to gradually slow, but without job losses, and the unemployment rate is forecast to peak at 4.3%.
For 2026, Barclays sees the Fed delivering three additional 25bp rate cuts, with the funds rate ending the year at 3.25%-3.50%. “With the Fed’s two mandates no longer in conflict, we expect the FOMC to deliver three 25bp cuts, in March, June, and September of that year,” the bank said.