Bucking the Trend: Citi's Three Reasons for Sticking with an October Rate Cut
N.R. Finch
Wall Street rushed to price in rate hikes after the Fed's hawkish turn, but Citi is betting the opposite — a 25 bp cut in October — backed by falling oil, weakening jobs, and a core PCE it calls an outlier.
What signal did the Fed send, and how did markets react?
After the June FOMC, Chair Wush dropped the easing-bias language. 9 of 18 officials' dot plots pointed to a rate hike this year.
Swap markets immediately pulled the first expected hike from March 2027 to October this year. The 2-year Treasury yield posted its biggest one-day jump since March.
This means → markets are already pricing in "the next move is a hike." The rate-cut narrative flipped overnight.
Where does the rest of Wall Street stand?
Deutsche Bank formally withdrew its easing forecast. It now expects the Fed to hike twice — in September and December — totaling 50 bp, pushing rates to 4.1%, and warns a July move is possible.
Goldman Sachs vice chairman Rob Kaplan, a former Dallas Fed president, warned that a fall hike would be "prudent" if inflation stays sticky — and that rate moves typically come in series of 2 to 3.
In plain terms = both houses are saying the same thing: once hikes start, expect more than one.
Why is Citi pushing back — what's the oil argument?
Citi argues the sharp drop in oil prices will drag gasoline lower, removing the main driver of the recent inflation uptick.
The 10-year breakeven inflation rate — a market-based gauge of future inflation expectations — has fallen to pre-conflict lows, tracking oil downward.
Citi contends that had Fed officials had more time to digest the energy-price shift, this FOMC statement would have been far less hawkish.
This means → Citi views the Fed's hawkish signal partly as an information lag, not a fundamental reassessment.
What does the jobs data add to Citi's case?
Initial jobless claims and continuing claims have both been rising for several consecutive weeks.
Citi notes this pattern appeared in both 2024 and 2025 — each time followed by soft payroll reports and rising unemployment.
The bank expects initial claims to hold near 224,000 and continuing claims to edge up to 1.813 million, with the 4-week moving average still climbing.
This means → if history repeats, the next few months of jobs data could force the Fed back toward easing.
Why does Citi call core PCE "unreliable"?
Citi forecasts the May core PCE monthly rate at 0.37%, while May core CPI came in at just 0.21% — a notable divergence.
The bank blames a specific distortion: core PCE is heavily influenced by AI-related prices. May PPI data showed portfolio-management fees surging 4.8% month-over-month, driven by the stock-market rebound from April lows to May highs — not genuine consumer-price pressure.
The Dallas Fed trimmed-mean PCE, San Francisco Fed cyclical PCE, Cleveland Fed median PCE, and core CPI all show a milder inflation trend than core PCE.
In plain terms = Citi's argument is that core PCE has been "contaminated" by AI and equity-market gains, making it an outlier among inflation gauges — and a poor basis for hiking.
What will settle this debate?
Citi projects core PCE year-over-year growth will ease from around 3.3% today to the 2.1%–2.2% range by mid-2027.
As AI-related prices flatten in the second half, the gap between core PCE and core CPI should narrow.
This reflects a deeper question: when inflation gauges contradict each other, whichever one the Fed chooses to trust will determine the rate path.
The ultimate test is straightforward: oil trajectory + jobs data + inflation-measure divergence — whichever side's data arrives first over the coming months wins the narrative.
Content is for reference only, not financial advice.