Citi Adjusts Forecast: Fed Expected to Cut Rates by 25 bps
Citi Adjusts Rate Cut Outlook for the Federal Reserve
Recent analyses from Citigroup indicate a change in perspective regarding interest rate changes in the United States. With the latest inflation data unveiled, Citi has modified its forecast, predicting that the Federal Reserve will cut interest rates by 25 basis points in the forthcoming meeting.
Impact of Employment Data on Rate Predictions
In light of recent non-farm payroll reports, Citi expressed a growing conviction that the Federal Reserve might implement multiple substantial rate cuts as signs of a cooling labor market become evident. However, particular scrutiny has been directed towards the unexpected strength in shelter inflation data, prompting a recalibration of these forecasts.
Understanding the Inflation Metrics
Delving into the specifics, analysts highlighted that core Consumer Price Index (CPI) inflation rose by 0.281% month-over-month, surpassing initial expectations. Among the components evaluated, the increase in owner's equivalent rent (OER), which surged by 0.50%, has been particularly noteworthy—marking the highest growth since January.
Despite this notable uptick in housing costs, which typically indicates inflationary pressure, Citi believes this could be a transient spike rather than a sustained increase. The analysts maintain that core inflation's overall trajectory remains subdued, underscoring the rationale for a prospective rate cut.
Rate Cut Justification
The firm's analysis suggests that the rising OER might be compelling enough for the Federal Open Market Committee (FOMC) to seek a 25 basis point cut instead of a more aggressive 50 basis point reduction in the upcoming meeting. Currently, the three-month annualized core CPI stands at 2.07%. Moreover, analysts forecast a modest 0.19% month-over-month reading on core Personal Consumption Expenditure (PCE) inflation for August.
The Labor Market's Role in Economic Policy
As the Federal Reserve continues to navigate its monetary policy, the labor market will remain a critical focal point. Citigroup is projecting a cumulative reduction of 125 basis points in interest rates over the year, anticipating cuts of 50 basis points each in November and December.
While the latest shelter inflation data might cause a more cautious approach to further rate reductions, Citi's broader economic assessments lend support to the likelihood of cutting rates. The proposed forecast indicates that the Federal Reserve is inclined to adopt a more methodical strategy, initiating the adjustments with a 25 basis point decrease in the upcoming meeting.
Frequently Asked Questions
What is Citi's recent forecast about Fed interest rates?
Citi anticipates that the Federal Reserve will lower interest rates by 25 basis points in the upcoming meeting.
What factors influenced Citi's outlook on rate cuts?
Recent inflation data, particularly concerning shelter inflation and the labor market, were pivotal in shaping Citi's revised expectations.
How much does Citi predict the Fed will cut rates this year?
Citi forecasts a total of 125 basis points in rate cuts throughout the year.
What is the current status of core CPI inflation?
The current three-month annualized core CPI is at 2.07% according to Citi's analysis.
Will the Fed be cautious with future rate cuts?
Yes, the recent housing inflation data may lead to a more cautious approach in implementing further rate reductions.
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