Citi Research analysts have forecasted a substantial 200 basis point cut in interest rates over the next eight Federal Open Market Committee (FOMC) meetings in a bold prediction that diverges sharply from prevailing market sentiment. This projection stands in stark contrast to the Federal Reserve's more cautious outlook, recently articulated by Fed Chair Jerome Powell.
Powell's Balanced Approach
At the beginning of July, Powell offered a balanced stance on monetary policy, indicating neither an imminent hike nor a cut in interest rates. During his testimony to Congress, Powell emphasized that the Fed would not consider reducing the federal funds rate until there is "greater confidence that inflation is moving sustainably toward 2 percent." The first-quarter data did not provide the necessary evidence, and Powell suggested that the Fed typically looks for favorable data for an extended period—potentially up to a year—before making such a move.
Citi's Aggressive Forecast
However, Citi's analysts are banking on a different scenario. They predict a series of rate cuts beginning as early as September, and continuing through each of the subsequent seven FOMC meetings. This aggressive stance is grounded in recent economic data that indicates a softening of activity across various sectors.
Supporting Economic Indicators
Key indicators supporting Citi's forecast include easing inflation rates, with metrics such as the Consumer Price Index (CPI) from the Bureau of Labor Statistics and Personal Consumption Expenditures (PCE) from the Bureau of Economic Analysis showing signs of moderation. Additionally, the Institute for Supply Management's (ISM) service-sector data has swung into negative territory, suggesting a contraction. Employment growth has slowed, and the unemployment rate has risen to 4.1%, with a notable drop of 49,000 temporary service jobs—a decline typically seen around the onset of recessions.
The Sahm Rule
Citi's analysis also references the "Sahm rule," an economic indicator developed by economist Claudia Sahm. It signals the start of a recession when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its low during the previous 12 months. While Powell's testimony suggested no immediate alarms from June data, Citi cautions that continued economic trends could trigger this indicator as early as August.
Potential Scenarios
The rationale behind Citi's forecast lies in two potential scenarios. The first is an optimistic "soft landing," where the economy recovers without entering a recession, leading the Fed to adopt a more accommodative stance to support growth. However, such a scenario would still make a 200 basis point cut seem overly aggressive unless the Fed perceives a new normal of persistently low rates.
Concerns of a Recession
The more concerning possibility is an impending recession. Citi's Chief U.S. Economist Andrew Hollenhorst has predicted a "hard landing," suggesting that the economy might experience a severe downturn that even substantial rate cuts could not mitigate. In this scenario, the Fed might resort to significant rate reductions to cushion the impact of a deep recession, attempting to stimulate economic activity despite the challenging conditions.
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