Citi analysts suggest that the Federal Reserve’s updated projections will likely indicate a more aggressive approach to cutting interest rates than previously anticipated, as the central bank seeks to support the economy. In a recent note ahead of next week’s monetary policy meeting, the analysts highlighted that policymakers may revise both the unemployment rate and the path for interest rates.
“Fed officials will need to significantly update their Summary of Economic Projections next week,” the analysts said. They predict that the unemployment rate will be revised upward by the end of this year, while the policy rate projections will be revised downward.
The analysts expect that the Fed’s “dot plot,” which reflects the rate expectations of voting members, will now show 100 basis points of cuts for the year, compared to the 25 basis point cut indicated in June.
A driving factor behind the shift toward a more dovish stance has been the recent deceleration in inflation. Citi anticipates Wednesday’s inflation data to mark the fourth consecutive month of slower core CPI growth. Given that markets are pricing in around 105 basis points of cuts, a median dot for 75 basis points “would be considered hawkish relative to expectations,” the analysts added.
The trajectory for rate cuts is still uncertain, and the size of the September cut could significantly influence the Fed’s future actions. Citi’s base case is for a 50 basis point cut in September, which would likely result in subsequent 25 basis point cuts in November and December. This scenario would imply a total of 100 basis points in cuts for the year. However, if the Fed opts for a smaller 25 basis point cut in September, they may signal the possibility of a larger 50 basis point cut at a later meeting.
With economic conditions sparking widespread debate, the upcoming Fed decision and revised Summary of Economic Projections will be closely monitored.
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