US Fed's Unexpected Hawkish Stance Is Unlikely To Last, Says Citi
A continued softening of the US labour market could see the US Fed cutting rates faster than market pricing.
While the US Fed on Wednesday cut its policy rates by 25 basis points along expected lines, it indicated a hawkish outlook for the 2025. US Fed Chair Jerome Powell indicated fewer rate cuts ahead, to just two in the calendar year ahead.
The unexpectedly hawkish commentary sent the Nasdaq composite index crashing by 3.9% before paring some losses. However, Citi research believes this hawkish stance is unlikely to last.
"..the continued softening of the labour market is likely to become even more evident in coming months, keeping the Fed cutting at a faster pace than markets are pricing," Citi said in a note dated Dec. 18.
Citi believes that markets are focusing too much on the idea that strong growth will keep inflation high, stopping the Fed from lowering rates, as stated in a note release a week ago.
"We expect a sharp dovish pivot from Powell and the committee in the next few months," the brokerage said in its recent note.
Citi highlighted that the median 2025 "dot" plot now implies just 50 basis points of rate cuts next year, down from the 100 basis points implied in September.
Upward revisions to inflation could be the biggest factor behind a slower pace of cuts, according to Chair Powell.
US Fed Policy: Five Key Highlights
1. US Federal Reserve reduced its key interest rate for the third time since the pandemic.
2. The median official has indicated a 50 basis point rate cut in 2025 to 3.9%.
3. Fed officials are predicting an unemployment rate of 4.3% in 2025.
4. US inflation outlook revised upward to 2.5%, compared to 2.1%.
5. The US economy is growing at 2.5%, which the Fed chair has termed, "healthy".
