Citi: Case for Rate Hikes Fading, Fed Expected to Cut in October
0xBroomberg
Citi Research says the June jobs report has demolished the case for rate hikes, and maintains its base call: the Fed will deliver a 25 bp cut on October 28, bringing the year-end rate to 3.0%–3.25%.
Why does Citi say "the case for hikes has vanished"?
The three pillars behind the hawkish stance — rising oil prices, accelerating wages, core PCE above target — have all crumbled.
June nonfarm payrolls came in at just 57,000, far below expectations; the prior two months were revised down by 74,000. This means → the three-month average has plunged from 180,000+ to roughly 111,000 — the labor market is cooling faster than headlines suggest.
In plain terms = every piece of evidence that said "the economy is too hot to cut" has stopped holding up.
The unemployment rate fell — so why does Citi call it suspect?
June unemployment dropped from 4.296% to 4.189% — on the surface, good news.
But Citi points out the decline came entirely from labor-force participation plunging from 61.8% to 61.5% — driven by a sharp drop among 25-to-34-year-olds. Fewer people found jobs; fewer people were counted. This means → holding participation steady, unemployment would actually have risen above 4.5%.
In plain terms = the rate fell not because hiring improved, but because job-seekers disappeared from the data — statistical noise, not an economic signal.
What is happening on the inflation side?
Oil has retreated to pre-conflict levels; July CPI and PCE are expected to show month-on-month declines. Shelter rents are also softening further.
The bigger story is the core PCE methodology revision — set to take effect in September. The new approach applies more realistic price adjustments for AI-related goods, and could shave 20–30 basis points off the year-on-year core PCE reading.
This means → Citi projects core PCE will drift from roughly 3.4% today to 3.0% by end-2026 and 2.1%–2.2% by mid-2027 — inflation is tracking toward the Fed's target.
Where does the Fed chair stand?
Chair Waller maintained his "no forward guidance" stance, explicitly declining to comment on the past two weeks of data.
At Sintra, he acknowledged inflation risks have eased over the past four weeks and flagged AI-driven productivity gains. Citi's read: "neutral — silent on future policy" — neither hawkish nor dovish.
In plain terms = the chair hasn't shut the door on cuts, nor pushed it open — but the door is ajar.
What does Citi's rate-path map look like?
July and September FOMC meetings: hold steady. October 28: first 25 bp cut, taking the range to 3.25%–3.5%.
December: another 25 bp cut, ending the year at 3.0%–3.25%. For 2027, Citi expects three more cuts to a terminal range of 2.75%–3.0%.
Citi also forecasts U.S. Q2 real GDP growth at 1.9% annualized — consumption contributing 1.3 pp, net exports dragging roughly 1.2 pp — a broader slowdown that reinforces the easing case.
Can this forecast actually materialize — and what should we watch?
Citi flags two checkpoints: whether core PCE is revised down as expected in September, and whether unemployment continues to climb.
This means → if the September methodology switch delivers a lower inflation reading and unemployment holds its upward drift, the odds of an October cut rise sharply.
Conversely, if the revision undershoots or payrolls suddenly rebound, this rate-path map will need to be redrawn.
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