Citi Now Expects First US Fed Rate Cut In September, Not July

(Bloomberg) -- Economists at Citigroup Inc., some of the last holdouts still predicting a Federal Reserve interest-rate cut in July, are pushing back their call.

The bank now sees US policymakers making their first move in September, Andrew Hollenhorst, Citigroup’s chief US economist, said in a report Friday, citing the just-released employment data for May as one of the reasons for the change.

“We are shifting our base case for the first rate cut from July to September,” Hollenhorst wrote. While the labor market and US economy both appear to be slowing, “surprisingly strong job growth” last month will probably stay the Fed’s hand while “waiting for more data on slower activity and inflation.”

Citi’s new forecast is for three quarter-point rate cuts this year — in September, November and December. Previously the bank forecast four, with one at each Fed policy meeting from July to December.

Yields surged and derivatives markets priced in a smaller total amount of Fed rate cuts this year after the employment report showed that job creation and wage growth exceeded economist estimates. The cumulative amount of easing expected by traders dropped by about 10 basis points to 38 basis points. 

Among other major Wall Street banks, at least six were forecasting a Fed rate cut in September as of this week, and at least four looked for an initial cut in December.

JPMorgan Chase & Co. was also predicting a July reduction as of this week. Chief US economist Michael Feroli didn’t immediately respond to an email asking whether anything had changed, and wasn’t available by phone.

Wall Street has been caught off guard all year by the resilience of the US economy after 11 Fed rate hikes from March 2022 to July 2023 brought the target range for the federal funds rate to 5.25% to 5.5%. At the start of the year, derivatives markets priced in at least six quarter-point rate cuts by December, and several banks had forecasts for at least five.

Those outlooks were gradually scaled back, particularly after progress toward lower inflation stalled. Fed policy makers, whose median end-2024 projection for the fed funds rate was 4.625% in December and March, responded with comments emphasizing the need for greater certainty on the inflation trend before cutting rates. Fed Governor Christopher Waller, for example, said on May 21 “several more” months of good inflation data were needed.

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