The potential for further rate cuts by the Fed has become a topic of intense discussion, with many beginning to believe there will be less rate cuts than initially anticipated. However, Citi analysts said in a recent note that they see the risk as balanced toward more rate cuts this year, not fewer.
Market thinks Fed won’t cut in June
The market's anticipation of the Federal Reserve's decision regarding a potential rate cut in June reflects a delicate balance.
Reports in mid-March stated that after a second straight month of stronger-than-expected inflation, the Federal Reserve lowering interest rates in June looks increasingly unlikely.
BMO (TSX:BMO) Capital’s Chief Economist wrote in a recent note that the initial inflation report for February was “an ugly read that will do nothing to soothe nerves on the FOMC.”
“Inflation remains the number one problem they still have yet to solve,” he added. “Clearly, restrictive monetary policy has not yet fully done its work and a patient and slightly hawkish Fed must remain in place for the monetary medicine to fully take effect.”
The move in treasuries on Monday has also fueled some concerns regarding the potential for the Fed to remain steady in June.
Citi sees more rate cuts
In its note, Citi analysts said that markets are pricing less than 50% probability that the Fed will cut in June.
“But we see risks as balanced toward more rate cuts this year, not fewer,” they stated. “0.26% core PCE and Chair Powell’s comments suggesting the Fed is on-track for cuts are more important than ISM manufacturing barely above 50.0.”
“The June FOMC had been close to fully priced for a rate cut after Chair Powell’s press conference and Fed projections indicated officials plan to cut rates 75bp this year despite core inflation ending the year above 2.5%,” added the bank. “But yesterday a mysterious sell-off in Treasuries began earlier in the morning and then continued after ISM manufacturing registered 50.3, its first above-50 reading since 2022.”
Citi feels that labor market data will be much more important for Fed policy than which side of 50 the manufacturing diffusion indices sit on. In addition, they see “mainly dovish risk” in this week’s data, projecting a below-consensus 150,000 new jobs on Friday.