Federal Reserve Faces Risk of Deeper Interest Rate Cuts, Citi Analysts Warn
In a recent note, Citi analysts have highlighted a significant risk facing the Federal Reserve: the potential necessity to implement "deeper and faster" interest rate cuts. This assessment comes after Chair Jerome Powell indicated that a rate cut is likely in September, pending stable inflation.
The focus has now shifted to the labor market, with an expected rise in the unemployment rate and projections of 150,000 new jobs. Citi is closely monitoring initial jobless claims, which have increased from their lows.
Citi's dovish stance is based on the assumption of subdued inflation, with the Fed expected to start rate cuts in September if core PCE inflation remains below 0.25% month-over-month. The market is currently pricing in about 70 basis points of cuts for this year.
The bank also notes a significant drop in two-year Treasury yields, warning that Fed officials may need to exceed anticipated cuts to stabilize the rising unemployment rate. Citi suggests that the Fed may need to cut rates to a neutral level, potentially requiring cuts at the next four policy meetings.
If the labor market weakens and inflation remains controlled, Citi believes there could be consensus within the FOMC to implement 50 basis point cuts in one or more meetings. Two upcoming job reports before the September FOMC meeting could increase the likelihood of a 50 basis point rate cut if monthly payroll increases are below 50,000 or the unemployment rate exceeds 4.3%.
In conclusion, the Fed's potential rate cuts could have a significant impact on the economy and financial markets. Investors should stay informed and be prepared for changes in interest rates that could affect their investment strategies.