Citi says Wall Street was wrong to cut bets on Fed rate cuts

(Bloomberg)-Citigroup Inc.

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After three consecutive months of slightly higher-than-expected inflation, Bank of America Corp, Goldman Sachs Group, Morgan Stanley and other bank competitors have lowered their expectations for rate cuts this year. On Tuesday, U.S. Federal Reserve Board Chairman Jerome Powell (Jerome Powell) said policy makers are not in a hurry to ease policy, which provides support for the above measures.

But Citi's Andrew Hollenhorst and Veronica Clark said it would be a mistake to rush to judgment because the Fed remains concerned that surprisingly strong economic growth could stall. As a result, the two are sticking to their forecast of a five-quarter point cut this year, saying policymakers are eager to seize on any signs of deflation or economic weakness.

"Our thinking on the 2024 economic trajectory is very different from other forecasters," Hollenhorst said in an interview." We think the Fed's response function is much more dovish than the consensus.

The bank's forecast contrasts sharply with the broader sentiment in financial markets, where last week's consumer price index report prompted investors to readjust their expectations and bond yields to soar. In the derivatives market, traders put the likelihood of the first rate cut in June at about 10%, and expressed skepticism that the Fed would cut rates twice this year.

However, over the past few years, the market has struggled to predict the Fed's moves - underestimating both the Fed's tightening and the speed with which it can turn the pendulum. If Citigroup's economists are right, the latest bounce could be just another misstep.

Key to their view is the upcoming release of the core CPI, the Fed's favored measure of inflation. Citi economists expect the index to show a cooling of price pressures. If the index rises by just 0.25% in March and April - roughly the same as it did in February - the Fed could find "reason to 'taper' its policy rate starting in June or July", the economists said. ", the economists said.

Citi also expects the Fed to place more weight on any signs of economic weakness - such as a slowing job market - than on data showing continued economic strength, as they see a tendency within the Fed to go easy on the family.

"Hollenhorst and colleagues wrote in a report on Wednesday that "despite the lack of 'urgency' claimed by Matty Powell and the committee, they are eager to begin lowering policy rates." The dovish asymmetry of the Fed's response letter appears to be underestimated by the interest rate market."

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