Citigroup: Reason for Hikes Has Vanished, Fed Seen Restarting Cuts in October

BlockBeats News, July 5th. In its US Economic Weekly Report released on July 2nd, Citigroup Research stated that the June US non-farm payroll data showed a significant weakening, strongly rejecting the need for rate hikes. Citigroup believes that several factors that previously supported a hawkish stance, including rising oil prices, accelerated wage growth, and core PCE above target, have successively faded away, and "the reason for a rate hike has disappeared."

The data shows that the US non-farm payrolls only added 57,000 jobs in June, far below expectations, and the combined data for the previous two months was revised down by 74,000 jobs. After the revision, the monthly average non-farm payroll growth for the past three months has dropped to about 111,000, a significant decrease from the pre-revised level of over 180,000. The June unemployment rate dropped from 4.296% to 4.189%, but Citigroup believes that this is mainly due to the labor participation rate falling from 61.8% to 61.5%. If the participation rate remains unchanged, the actual unemployment rate would rise to above 4.5%.

Regarding inflation, Citigroup stated that multiple factors are collectively exerting downward pressure on prices. Oil prices have fallen back to pre-conflict levels, and July CPI and PCE data are expected to show a month-on-month decline; further slowing in housing rents will also drag down core CPI and core PCE. In addition, the core PCE methodology revision will adopt a more reasonable price adjustment method for AI-related goods. Citigroup estimates that after the revision, the year-on-year growth rate of core PCE may be lowered by 20 to 30 basis points and will be officially reflected in September.

Citigroup maintains its baseline forecast, expecting the Federal Reserve to hold steady at the July and September FOMC meetings, cut interest rates by 25 basis points for the first time at the October 28th meeting, and cut rates by another 25 basis points in December, bringing the federal funds rate range to 3.0% to 3.25% by the year-end. Citigroup also expects the Fed to cut rates three more times in 2027, with a terminal rate range of 2.75% to 3.0%.