Citi Predicts the Fed Will Implement an Additional 50 Basis Point Cut in November

Citi strategists anticipate that the Federal Reserve will implement a further rate cut of 50 basis points in November, contingent upon incoming data, particularly the upcoming monthly jobs report.

Currently, jobless claims remain low, and focus is shifting towards the employment components of the PMI data. The core PCE inflation report, set to be released soon, is also expected to keep Fed officials attentive to the labor market’s condition, according to Citi.

Chair Jerome Powell characterized the Fed’s initial 50 basis point rate cut as a significant indication of the central bank’s readiness to act decisively if labor market conditions necessitate additional support.

Strategists observed that if the unemployment rate stabilizes around its current levels, the Fed may opt to reduce the pace of rate cuts to 25 basis points per meeting. Nonetheless, they believe forthcoming data will likely encourage the Fed to maintain a more aggressive rate-cutting trajectory.

They predict that core PCE inflation will increase by only 0.18% month-over-month, suggesting an annualized core inflation rate of 1.95% over the past three months.

The favorable inflation context is expected to keep officials focused on labor market considerations, as low layoff rates and steady jobless claims have offered some reassurance. However, Citi also highlights a declining hiring rate and private payroll growth, which now averages about 90,000 jobs per month, as indicators that unemployment may rise.

With two additional jobs reports expected before the November Federal Open Market Committee meeting, Fed officials will have more opportunities to assess the ongoing softening trend in the labor market.