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Will the Fed Cut Interest Rates Again? Tonight's Data Is Key

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Citi believes geopolitical turbulence is temporary and the rate cut trajectory remains unchanged. Meanwhile, Deutsche Bank warns that the policy has reached a neutral stance, with no interest rate cuts in the foreseeable future.

Original Article Title: "Will the Fed Cut Rates Again? Tonight's Data Is Key"
Original Article Author: Dong Jing, Wall Street News

Caught between geopolitical conflicts and a rebound in inflation, the market's expectations for a Fed rate cut are experiencing drastic swings. The core of the current market debate is whether the soaring energy prices will lead to sustained inflation or will bite back consumer demand, forcing the Fed to cut rates?

On April 21, according to Windseeker Trading Desk, Citigroup provided clear reasons in its latest research report for a rate cut, believing that the oil supply disruption is just a temporary disturbance, the rate cut path may be bumpy but the direction is clear; while Deutsche Bank poured cold water, warning that the Fed's policy is already neutral and is expected to maintain the current rate indefinitely.

Amid the clash of views between the two major investment banks, the upcoming March retail sales data will be the key litmus test to break the deadlock. This data will not only reveal the true impact of high oil prices on core consumption but will also directly determine the Fed's policy path in the near term.

Citigroup: Geopolitical Disturbance Is Temporary, Overall Rate Cut Direction Unchanged

Despite the ongoing impact of geopolitical developments on the market, Citigroup remains firm in its belief that the path to lower rates and a more dovish Fed policy still exists.

The core logic of this assessment is: the impact of the Strait of Hormuz situation on oil supply is increasingly likely to be brief rather than a sustained source of inflation. On April 18, there were reports that the Strait of Hormuz would reopen, although later questioned, both the bond yields and oil prices have retraced from Thursday's highs and are maintained at lower levels—a signal that the market is pricing in the scenario of a "temporary impact."

The research report pointed out that Citigroup's logic chain is clear: Geopolitical conflict is temporary → Oil price impact is not sustained → Inflation pressure is not spreading → The Fed has the conditions to return to the rate-cutting track.

In addition, a series of underlying economic data tracked by Citigroup indicate that a subtle change is taking place in the macroeconomic financial environment:

Liquidity and Financial Conditions: The Fed's reverse repo (RRP) volume has dropped significantly to near-zero levels; at the same time, recent financial conditions are tightening, and mortgage rates are once again showing an upward trend.

Labor Market: Indeed job vacancy data have recently shown a sideways consolidation trend, although initial jobless claims remain overall low.

Funding Conditions: As of now, this year's individual tax refunds (cumulatively in billion-dollar terms) are slightly higher than the same period last year.

Tonight's Litmus Test: Why is March's 'Control Group' Retail Sales Data Key?

Amidst interest rate cut expectations, the upcoming March retail sales data will provide investors with firsthand clues, revealing to what extent the soaring gasoline prices have cut into consumers' spending on other categories of goods.

Citi emphasizes that investors must "look beneath the surface" when interpreting this data. Due to the rising gas prices, the nominal retail sales for March are bound to show a surge. However, what truly guides the Fed's policy direction is the "control group" sales data.

The report highlights that this data excludes sales from gas stations and certain specific categories, offering a more genuine and accurate reflection of whether high oil prices have led to a softening of consumer spending in other areas. If the 'control group' data unexpectedly weakens, it will powerfully confirm that high inflation is biting back demand, thereby providing crucial data support for the Fed's rate cut logic.

Deutsche Bank's Cold Water: Policy at Neutral, Fed May Stand Pat Indefinitely

In stark contrast to Citi's optimistic outlook, Deutsche Bank has given an extremely cautious assessment of the rate cut prospects. In a research report, Deutsche Bank explicitly states that the Fed is expected to maintain the current rate indefinitely as the current policy is already at a neutral stance.

Deutsche Bank's pessimistic outlook is primarily based on the following core points:

Inflation Ebbing: Widespread inflation metrics indicate that the US's progress in combating inflation has stalled.

Official Hawkish Shift: Deutsche Bank's tracking of Fed officials' speeches shows that officials like Waller and Miran have adopted a more hawkish tone, while most officials continue to believe the current policy stance is "well positioned." Specifically:

· Waller: Turning hawkish. He notes that an extended Middle East conflict would obstruct the rate-cut path; a series of shocks (tariffs plus oil prices) could trigger a more sustained inflation rise; he also emphasizes that core inflation, excluding the tariff impact, is close to 2%, and there's fragility in the labor market;

· Miran: Currently the most dovish voice, supporting 3 or even 4 rate cuts this year, believing that the outlook for inflation after 12 to 18 months remains unchanged by the war, and the oil price shock is temporary;

· Williams: Believes that the policy is "just where it needs to be," raising the inflation forecast for 2026 to around 2.75% and lowering the economic growth forecast for 2026 to 2% to 2.5%;

· Hammack: Clearly stated that interest rates will "remain unchanged for a considerable period of time";

· Goolsbee: Warned that if oil prices continue to stay at $90 per barrel, it may spread to other prices; the probability of further rate cuts in 2026 is low, and rate cuts may need to wait until 2027;

· Daly: Believes that the current policy is in a "very good place," and if the oil price shock continues until the end of the year, market pricing shifting to "zero rate cuts" is not surprising.

The minutes of the Fed's March meeting also showed that the vast majority of officials believe that the process of inflation returning to the 2% target will be delayed; some officials even discussed the need to include "two-way risk" language in the meeting statement, implying that the possibility of rate hikes is not completely ruled out.

Deutsche Bank's hawk-dove rating of Fed officials shows that the average score of the 2026 voting committee is 2.8 (with 1 being most dovish and 5 being most hawkish), leaning slightly dovish towards neutral, but dovish voices are clearly in the minority.

Market Pricing Completely Reversed: Faced with persistent inflation pressures and strong economic resilience, market expectations have undergone a dramatic shift. According to Deutsche Bank's data, current market pricing expects "zero rate cuts" for the entire year 2026, with a rate cut not expected until the summer of 2027.

Deutsche Bank expects that, in the base case scenario, the federal funds rate will remain at 3.63% throughout 2026 to 2028, with no rate cuts throughout the year.