Despite the latest U.S. employment data significantly exceeding market expectations and further strengthening expectations that the Federal Reserve will maintain high interest rates or even restart hikes, Citigroup continues to insist that the Fed will cut rates three times this year.
Citigroup's Chief U.S. Economist, Andrew Hollenhorst, stated in a report on Friday that the robust May jobs report will undoubtedly lead Fed officials to focus more on inflation upside risks rather than labor market weakness risks at their June policy meeting. However, he anticipates a gradual cooling of the U.S. labor market over the next three months, which will drive the market to reprice rate cut expectations.
Hollenhorst noted: "Signs of labor market weakness will become more apparent in the coming months, and the market's focus will ultimately shift back from hike risks to the possibility of rate cuts."
Data released by the U.S. Labor Department showed that non-farm payrolls increased by 172,000 in May, not only surpassing all economists' forecasts in media surveys but also pushing the three-month job gain to its largest increase in over two years.
The strong employment data further confirms the resilience of the U.S. economy while diminishing market expectations for near-term Fed rate cuts. However, Citigroup has not adjusted its monetary policy forecast in response.
The bank still expects the Fed to implement three consecutive 25-basis-point cuts to the federal funds rate in September, October, and December of this year.
In fact, Citigroup has maintained its call for "three rate cuts within the year" since last December, only gradually pushing back the timing of the first cut from January to September this year as the inflation landscape evolved.
Compared to Citigroup, the stance of mainstream Wall Street institutions has shifted noticeably. At the beginning of the year, most major investment banks still expected the Fed to begin a cutting cycle in 2026, with most forecasting around two cuts.
However, as the U.S.-Israel conflict with Iran triggered a surge in oil prices, energy costs fueled inflation, and the U.S. job market remained robust, expectations for Fed policy changed significantly.
Currently, major U.S. stock indices continue to hit record highs, the labor market remains solid, while inflation persists above the Fed's 2% target.
Against this backdrop, most Wall Street firms have successively abandoned their forecasts for rate cuts this year.
As of now, among major U.S. investment banks, only Citigroup and Goldman Sachs still anticipate Fed rate cuts this year. Among them, Goldman Sachs last month maintained its forecast for a single cut in December, while Citigroup has become Wall Street's most steadfast dovish representative.
Simultaneously, an increasing number of institutions are beginning to discuss the possibility of rate hikes. Since the Fed's April policy meeting, market judgment on the monetary policy outlook has clearly shifted towards a more hawkish stance.
Meeting minutes revealed that three policymakers at that time opposed retaining "accommodative" language in the policy statement, arguing that hints of potential future rate cuts should be removed.
Recently, Federal Reserve Governors Waller and Cook, along with several regional Fed presidents, have publicly stated that further rate hikes are possible if inflation remains above target levels.
Among Wall Street firms, JPMorgan Chase has been predicting Fed rate hikes starting in 2027 since January this year; BNP Paribas turned more hawkish after the latest jobs data, forecasting the Fed to begin a series of three hikes starting in December 2026.
Nevertheless, Citigroup continues to draw market attention due to its forecast accuracy over the past year. Last year, when most major banks believed the Fed would hold steady, Citigroup correctly predicted that the Fed would implement three 25-basis-point rate cuts.
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