According to a recent study by Citi analysts, the market is potentially overlooking the Federal Reserve’s propensity to cut interest rates in the near future, citing reasons related to inflation and economic activity. The note underscores the desire of Chairman Powell and the Federal Open Market Committee (FOMC) to initiate lower interest rates, despite the apparent lack of urgency.
Analysts have suggested that maintaining higher interest rates for an extended period could increase the risk of a recession. However, they argue that any rate cut will largely depend on the performance of core inflation. So far this year, core inflation has fallen short of expectations driving rate cuts.
Chairman Powell recently noted that core personal consumer spending (PCE) inflation remaining at 2.8% year-over-year in March could justify delaying rate cuts. However, Citi’s forecasts differ, with core PCE inflation expected to be slightly lower at 2.7% YoY by the end of the month. They also forecast a potential contraction of up to 2.6% YoY in April, with data to be released after the May FOMC meeting but before June.
The note highlights that current market expectations of a rate cut of just 40 basis points (bps) by 2024 may not fully reflect the Federal Reserve’s willingness to adjust rates based on developing inflation trends or any signs of economic growth. softness. Citi’s analysis suggests a larger rate adjustment may be warranted, either due to a slower year-on-year core inflation or signs of weakness in economic activity.
This outlook highlights continued uncertainty in the macroeconomic environment and underscores the Federal Reserve’s proactive stance in responding to potential economic headwinds. Market interpretations of future rate moves may underestimate the Fed’s willingness to act decisively based on incoming economic data, according to Citi analysis.