Barclays: Fed Rate Hikes Unlikely, But Risks Remain

While the Federal Reserve is expected to keep interest rates steady on Wednesday, speculation about potential hikes has resurfaced.

Analysts at Barclays still anticipate a gradual decline in rates through 2025 but acknowledge that a rate hike isn’t entirely off the table. Options markets currently price in a 25% chance of an increase.

“The threshold for the Fed to reverse its rate-cutting course is high,” Barclays’ macro research team noted in a client report Tuesday. “Such a move could damage the Fed’s credibility.”

However, they warned that a shift in economic conditions—such as a renewed surge in inflation, rising inflation expectations, or a sharp drop in unemployment—could prompt policymakers to reconsider.

Lessons from Past Fed Reversals

Barclays examined three historical cases where the Fed reversed course and raised rates:

• March 1997 & June 1999: The Fed hiked rates in response to tight labor markets and strong economic growth.
• Late 2021 to Early 2022: The Fed first slowed balance-sheet expansion—seen as a proxy for tightening—before officially signaling rate hikes.

In all instances, labor market strength and a steepening yield curve were major drivers.

Market Implications

The 10-year Treasury yield (4.52%) has already climbed above the 3-month yield (4.29%), reflecting confidence in economic resilience but also concerns over potential inflationary pressures under a second Trump administration.

Short-term yields initially declined when the Fed began cutting rates in September and December, bringing its policy rate to 4.25%–4.50%—a full percentage point below its peak.

If the Fed signals a possible hike, Barclays expects the 2-year and 10-year Treasury yields to exceed 5%, which could weigh on equities. The bank previously warned that a 10-year yield at 5% could be problematic for stocks.

Treasury Market & Liquidity Shifts

A shift toward rate hikes could trigger a repricing in short-term Treasury rates, further expanding the $7 trillion money-market fund industry while pressuring bank deposits.

The Road Ahead

Despite the uncertainty, market sentiment still leans toward additional rate cuts in 2025. As of Tuesday, Fed-funds futures traders were pricing in a 50-basis-point cut this year, up from 25 basis points the prior week, per the CME FedWatch Tool.

Investors will be closely watching Fed Chair Jerome Powell’s press conference on Wednesday and Friday’s release of the December personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge.