"‘Roughly neutral’ or ‘slightly restrictive’? Citi interprets Powell’s speech: The threshold for rate cuts is already quite low, and three rate cuts are expected this year."
At January’s FOMC meeting, Powell did his utmost to maintain a stance of “giving no new guidance,” trying to convince the market that the Fed is currently in a wait-and-see mode.
However, for sharp investors, the signals released at this meeting were much more dovish than they appeared on the surface. Although the Fed kept rates unchanged, Powell admitted that the current policy rate is in a “slightly restrictive” range and is cautious towards the so-called “stabilization” signs in the labor market. This actually exposes the Fed’s internal concerns about an economic slowdown.
According to ChaseWind Trading Desk, on January 28, Citibank directly pointed out in its latest report: Although the Fed is standing pat for now, the threshold for rate cuts is actually very low. Whether it’s a rising unemployment rate or continued signs of weakening inflation, both could quickly trigger a rate cut.
Based on this, Citi maintains its aggressive prediction, believing that the Fed will cut rates by a total of 75 basis points by 2026. For investors, this means that the liquidity inflection point is not far away; the current “pause” is nothing but a prelude to the next round of easing. The key trading moments may be in March, July, and September — Citi’s predicted windows for cuts. Do not be fooled by Powell’s calm appearance; the real contest is in how he defines “restrictive” rates, which leaves ample runway for a future policy shift.
Fuzzy “Neutral” vs. Explicit “Restrictive”
The most intriguing detail of this meeting lies in Powell’s description of the current rate level. He continued to describe the policy rate as being at the top end of the neutral range, and stated that the policy rate “might be roughly neutral, or just a little bit restrictive.”
This subtle semantic difference is crucial. If it’s “accommodative neutral,” it means the Fed could maintain the status quo for a long time; but if it’s “slightly restrictive,” then if inflation keeps falling, real rates will effectively rise, thereby excessively suppressing the economy.
Powell reiterated that most officials expect further rate cuts this year, and currently, no officials include a rate hike in their baseline assumptions. This stance essentially locks out the risk of hikes, establishing a one-way downward trend for rates — the only suspense now is timing.
Labor Market: Surface Stabilization and Underlying Weakness
The Fed made a slight adjustment to its labor market description in the policy statement, changing “unemployment rate is gradually rising” to “shows some signs of stabilization,” and dropped the phrase “downside risks to employment have increased in recent months.” On the surface, this seems to support a hawkish stance.
However, Citi points out that investors must not over-interpret this change.
Powell explicitly downplayed this revision in the press conference, warning that he “wouldn’t read too much into it.” While he acknowledged that this could be an early sign of stabilization, he also listed evidence that the labor market remains weak. He specifically cited consumer survey data by the Conference Board, noting that the number who feel “jobs are plentiful” is declining, while those who feel “jobs are hard to get” is rising. This shows that the Fed Chair himself does not believe the labor market is out of the woods; this “critical” attitude to the data suggests his inclination to seek reasons for rate cuts.
Inflation Path: Tariff Disruptions Do Not Change Downward Trend
Regarding inflation, Powell maintained a constructive attitude, expecting inflation to continue to trend back towards the 2% target. Current core inflation is slightly above target, mainly due to price increases for goods linked to tariffs.
Powell clearly stated that this tariff-driven goods price strength is expected to dissipate by mid-year. Meanwhile, service prices are cooling. This means the Fed sees the current inflation rebound as a temporary supply-side shock rather than overheating demand. As long as service inflation continues to decline, the Fed is confident about hitting the inflation target later this year. This characterization of inflation’s cause further clears the way for cuts.
Internal Divisions: Waller Casts a Dissenting Vote
This meeting was not united; the vote revealed divisions within the Fed. Although most favored holding rates, Miran and Waller voted against, leaning towards a 25 basis point cut at the meeting.
Especially Waller’s dissent, though expected by the market, simply confirms his known dovish stance. In contrast, Goolsbee and Schmid favored holding steady. These internal differences show that even during a pause, the forces supporting easing are strong — and have not been fully convinced by so-called “robust” economic data.
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