The Fed won't cut interest rates until late 2023 as the US economy continues to look resilient, Barclays says

• Barclays on Tuesday shifted when it sees the Fed starting to cut interest rates in 2023.
• A shallow recession should start later than Barclays anticipated, leading the investment bank to see rate cuts beginning in November 2023.

The US economy is expanding at a stronger near-term pace than anticipated by Barclays, leading the investment bank to push back its timeline on when the Federal Reserve will start cutting the key interest rate it jacked up this year to arrest high inflation.

Barclays now expects the Federal Open Market Committee to begin chopping down the fed funds rate in the fourth quarter of 2023, with rate cuts of 25 basis points each at the November and December meetings. Such moves would push the rate to a range of 4.5% to 4.75%.

The international investment bank had previously expected rate cuts to start in the third quarter of 2023, sized at 25 basis points. Stocks have dropped into a bear market during 2022 with investors waiting on signs from the Fed to signal when it will start cutting rates after making aggressive moves this year.

The outlook stems from indicators of US activity continuing to "look resilient" through October, suggesting stronger near-term growth in gross domestic product, it said.

"Our revisions allow spending momentum to carry into early 2023, pushing back the shallow recession that we had shown in our prior forecast by one quarter, to Q2 2023 through Q4 2023," Marc Giannoni, chief US economist at Barclays, wrote in a note published Tuesday.

Fed policy makers, led by Chairman Jerome Powell, are still focused on elevated inflation levels and look set to raise rates at the upcoming December 13-14 meeting by 50 basis points. A December hike would be the seventh in 2022 as consumer price inflation sits below 8% but it would be slower than the four previous rate hikes of 75 basis points.

Barclays then projects a February 2023 rate increase of 50 basis points followed by a March hike of a quarter-percentage point to a range of 5% to 5.25%.

The economy could expand by 1.5% in the fourth quarter of 2022 on a quarter-over-quarter basis, said Barclays in upwardly revising its projection from a flat rate. That outlook would be driven in part by gains in private consumption. The October PMI reading from Institute for Supply Management indicated strength among consumers with monthly growth in the forward-looking new-orders index.

A "softish landing" is the best way to characterize the recession that's likely on the way, said Barclays.

"The downturn is driven by an intensifying drag from tight financial conditions, with household spending flattening, business investment showing cyclical declines, and housing construction continuing on a weak trajectory," said Giannoni. Its projection of a cumulative GDP decline of 0.7% is roughly in line with its prior outlook, Barclays noted.