Economy

Citi Adjusts Outlook, Anticipates 25 Basis Point Fed Rate Cut Next Week

Citigroup analysts have updated their forecast for US interest rate cuts following the latest inflation data, now expecting the Federal Reserve to reduce rates by 25 basis points at its upcoming meeting next week.

After last week’s non-farm payroll data, Citi expressed growing confidence that the Fed would implement multiple larger rate cuts due to a cooling job market. However, their revised outlook is largely influenced by unexpectedly strong data on shelter inflation.

The analysts highlighted that core Consumer Price Index (CPI) inflation increased by 0.281% month-over-month in June, surpassing their expectations. The standout component was the owner’s equivalent rent (OER), which saw a 0.50% rise—the highest since January.

While this signals a potential uptick in housing inflation, Citi considers it more likely to be a temporary occurrence rather than a lasting trend.

Despite the increased OER data, Citi maintains that core inflation is slow enough to warrant a rate cut. They noted that the rise in OER could persuade the Federal Open Market Committee (FOMC) to opt for a 25 basis point cut instead of a 50 basis point reduction at their next meeting.

Currently, the three-month annualized core CPI stands at 2.07%, and analysts anticipate a modest month-over-month core Personal Consumption Expenditures (PCE) inflation reading of 0.19% for August.

The labor market will remain a key focus for the Fed, with Citi predicting a total of 125 basis points in rate cuts this year, including 50 basis points in both November and December.

While the stronger OER data may prompt a more cautious approach to rate cuts, Citi believes that the overall economic landscape still supports a reduction in rates. Their revised forecast indicates that the Fed is likely to adopt a gradual approach to cutting rates, initiating with a 25 basis point reduction next week.

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