Robust employment data has prompted a complete market shift towards expectations of interest rate hikes, yet Citigroup economists are bucking the trend by maintaining their forecast for rate cuts, becoming the most solitary voice on Wall Street.
The May non-farm payrolls data exceeded all expectations, triggering a severe sell-off in the bond market, with the interest rate swap market now fully pricing in one Fed rate hike this year. In this context, among the major Wall Street investment banks, nearly all have abandoned their predictions for rate cuts in 2026, with some even shifting to forecast hikes—while Citigroup continues to hold its forecast for three rate cuts this year, standing almost entirely alone on the Street.
On June 6th, according to a Bloomberg report, Citigroup's chief US economist, Andrew Hollenhorst, stated on Friday that the strong jobs report will lead Fed officials at their June 16-17 meeting to "hawkishly focus on the upside risks to inflation, rather than the downside risks to employment." However, he anticipates the labor market will weaken over the next three months, at which point the market will "reprice the probability of rate cuts, not hikes." Citigroup maintains its forecast for the Fed to cut rates by 25 basis points each in September, October, and December.
This view stands in stark contrast to the current market direction. The bond market has been hit hard, with the 2-year Treasury yield surging 15 basis points in a single week. The interest rate swap market indicates the probability of a Fed hike by December is now fully priced in, with about a 60% chance of a hike by October.
Employment Data Surprises, Prompting a Broad Market Shift to Hike Expectations
May non-farm payrolls increased by 172,000, exceeding the forecasts of all economists surveyed by Bloomberg and marking the largest three-month gain in over two years. This data served as the final straw that broke the back of rate cut expectations, directly igniting a massive sell-off in the bond market.
The reaction in the interest rate swap market was swift and severe. Traders have fully priced in a 25-basis-point Fed rate hike by December, with the probability of a hike by October around 60%.
The most interest-rate-sensitive short-end yields were hit the hardest. The 2-year Treasury yield rose 15 basis points over the week, while the 30-year yield rose only 3 basis points, leading to a significant flattening of the yield curve. The 30-year Treasury yield has climbed back above the 5% threshold.
Wall Street's Collective Retreat, Citigroup Holds the Line for Cuts
At the start of the year, most major Wall Street banks predicted the Fed would cut rates in 2026, though most only forecast two cuts. However, as the war in Iran triggered a surge in oil prices, inflation remained persistently high, the labor market showed continued resilience, and major US stock indices repeatedly hit record highs, these institutions have successively abandoned their rate cut forecasts.
Currently, among the major Wall Street investment banks, only Citigroup still predicts the Fed will cut rates this year. The other institutions have not only withdrawn their rate cut forecasts, but some have gone a step further to predict hikes.
According to reports, Goldman Sachs abandoned its expectation for rate cuts this year in its latest research note, arguing that the triple pressures of tariffs, high oil prices, and AI demand will keep core PCE inflation above 3% in 2026, leaving the Fed with little urgency to cut.
Meanwhile, JPMorgan Chase has included a 2027 rate hike in its baseline forecast since January; BNP Paribas updated its forecast following Friday's non-farm payrolls data, expecting the Fed to implement three consecutive rate hikes starting in December 2026.
In the face of this broad market shift, Citigroup's steadfastness is not without basis. Andrew Hollenhorst's core judgment hinges on a timing discrepancy: he believes the current strong employment data will not persist, and the labor market will show significant softening over the next three months, thereby reopening the window for rate cuts.
Citigroup has maintained its forecast for three rate cuts this year since last December, although the timing of the first cut has gradually been pushed back from an initial prediction of January to September as circumstances evolved.
It is noteworthy that Citigroup performed well on Fed predictions last year—accurately forecasting three 25-basis-point rate cuts when several large rivals predicted the Fed would stand pat. This track record is likely a key reason its current view still commands market attention.
Currently, most banks that have abandoned 2026 rate cut forecasts still expect the Fed to pivot to easing in 2027, but a growing number of institutions—especially following the April policy meeting—have begun characterizing the next move as a hike, not a cut.
The divergence between Citigroup and the market mainstream is no longer merely a difference in the timing of cuts, but a fundamental disagreement over the direction of Fed policy.
Analysis suggests the core of the current market divide lies in how the dual pressures facing the Fed will evolve.
On one hand, the labor market remains persistently strong, inflation risks are elevated, and some officials explicitly opposed retaining language suggesting a "dovish bias" in the April policy statement—at that time, three policymakers objected to including language on balanced risks to employment and inflation.
On the other hand, Citigroup believes the strength in employment data is temporary. Once the labor market cools, the Fed's policy balance will tilt back towards favoring employment.
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