The Fed turns hawkish, Wall Street surrenders one after another, Citibank remains "the last holdout": insists on restarting rate cuts in October

As the Federal Reserve unexpectedly turned sharply hawkish and major Wall Street institutions sequentially withdrew their expectations for monetary easing, Citigroup insisted on an opposing view, maintaining that rate cuts within this year remain highly probable, setting its base case scenario as restarting the easing cycle in October.

At the June FOMC meeting, 9 out of 18 Fed officials pointed to a rate hike in their dot plots, far exceeding market and analyst expectations. Chairman Walsh formally deleted the "easing bias" wording from the post-meeting statement and refused to offer any forward guidance. In response, the swaps market swiftly brought forward its first rate hike expectation from March 2027 to October this year, with roughly 37 basis points of hikes now priced in for the remainder of 2024. The 2-year US Treasury yield posted its biggest single-day gain since March following the meeting.

Faced with this hawkish shock, Wall Street institutions have changed their stance one after another. Deutsche Bank officially withdrew its easing prediction in its latest report, now expecting the Fed to hike rates twice—once in September and again in December, totaling 50 basis points and pushing rates up to 4.1%. It also warns that action could come as soon as July; Goldman Sachs Vice Chairman and former Dallas Fed President Rob Kaplan warns that if inflation data remains stubborn, the Fed could restart rate hikes as early as autumn, likely in a series of 2-3 consecutive moves.

Citi's Andrew Hollenhorst team maintains a base forecast directly contrary to market consensus: the next move is a rate cut, not a hike, with their baseline scenario being a 25 basis point cut in October, followed by additional 25 basis point cuts in December and again in January 2027. Citi’s core arguments are: plunging oil prices are dissolving the main upward risks to inflation; initial jobless claims are trending up, mirroring 2024 and 2025’s seasonally weak patterns; and core PCE stands out among inflation metrics as the “outlier,” with its strength reflecting equity price rises rather than broad consumer price pressure.

Citi Argument #1: Falling Oil Prices Are Removing Inflation Risks

Citi’s first key argument for the rate cut forecast comes from the rapid decline in oil prices. The bank believes that lower oil prices will lead to falling gasoline prices, thereby eliminating the prior main source of rising inflation. Market-based inflation expectation measures have already declined alongside oil prices, with the 10-year breakeven inflation rate dropping to pre-conflict lows.

Citi notes that, had Fed officials had more time to digest the latest energy price changes, the hawkish tone of this FOMC meeting would have been noticeably milder. The bank expects that as the effect of lower oil prices gradually appears in the data, inflation readings in coming months will moderate, supporting more Fed officials shifting to a dovish stance by September and creating conditions for rate cuts by year end.

Citi Argument #2: Labor Market Weakness Mirrors Seasonal Patterns

Citi’s second key argument focuses on early signs of labor market weakness.

Both initial and continuing jobless claims have shown several consecutive weeks of increases. Citi points out this pattern also appeared in 2024 and 2025, subsequently triggering a string of softer monthly jobs reports and a higher unemployment rate. Rising unemployment is a key driver for Citi’s rate cut expectations within this year. The bank expects initial jobless claims (for the week ending June 20) to stay around 224,000, continuing claims to edge up to 1.813 million, and the 4-week moving average to keep climbing. Although the absolute level is still not high, if the rising trend persists, it supports a view of a gradually weakening labor market.

Regarding the overall economy, Citi tracks Q2 GDP growth at 2.5%. For consumption, May retail sales control group grew 0.7% month-on-month, showing resilience, but actual disposable income growth has slowed to nearly zero, with the savings rate staying low—suggesting risks of slower spending growth are building.

Citi Argument #3: Core PCE Is an "Outlier"—The Inflation Picture Is Not Unanimous

The third pillar behind Citi’s contrarian call is their skepticism about the core PCE metric itself.

May’s core CPI monthly increase was only 0.21%, showing moderation; but Citi forecasts the soon-to-be-released May core PCE monthly rate to be as high as 0.37%, a significant divergence between the two. Citi believes the current strength in core PCE has a special cause: it is highly influenced by AI-related prices and directly lifted by rising stock prices—the May PPI showed portfolio management fees jumped 4.8% month-on-month, mainly reflecting the rebound in stock prices from early April lows to early May highs, not genuine consumer price pressure.

Looking across other metrics, Dallas Fed Trimmed Mean PCE, San Francisco Fed Cyclical PCE, Cleveland Fed Median PCE, and core CPI all show more moderate inflation trends than core PCE. Citi sees core PCE as increasingly becoming an “outlier” among inflation indicators, not a reliable signal of broad consumer price pressures.

Citi expects that as AI-related prices flatten out in the second half of the year, the gap between core PCE and core CPI will narrow, and overall inflation trends will become more supportive of monetary easing. Their forecast trajectory is for core PCE annual growth to fall from about 3.3% now to 2.1%-2.2% around mid-2027.

Wall Street "Surrenders": Deutsche Bank Forecasts Two Rate Hikes, Goldman Warns of Serial Tightening

However, faced with Walsh’s hawkish surprise, Wall Street institutions have changed their positions. Deutsche Bank’s Chief US Economist Matthew Luzzetti’s team clarified in their report that prior reluctance to raise forecasts mainly stemmed from two uncertainties: high uncertainty to the economic outlook from Iran, and the yet unclear monetary policy reaction function of the new Fed chair Walsh. The June FOMC meeting resolved both worries at a stroke.

Deutsche Bank sharply raised its inflation forecasts, lifting core PCE projections for end-2026 and 2027 to 3.2% and 2.5%, respectively, and updating their base scenario: the Fed will hike in September and December, totaling 50 basis points and raising rates to 4.1%; then will stay put all through 2027, only starting to cut in the first half of 2028. DB also warns of hawkish risks: if Walsh has publicly pledged to “fix” the price stability problem and the committee does not act fast enough, its credibility will be tested—meaning a rate hike could come as early as July and, to fully unwind last year’s easing, the total hike this year might have to reach 75 basis points.

Goldman Sachs Vice Chairman Rob Kaplan was categorical: if inflation data does not cool by September, an autumn rate hike would be a “wise move.” He particularly stressed that Fed policy shifts rarely occur as single, isolated moves—rate changes usually unfold as a series of two to three actions: “If you act in September, you need to be ready—there may be one or two more hikes.” Having experienced multiple monetary cycles, Kaplan’s warning based on historical precedent serves as a wake-up call to markets.

Risk Warning and DisclaimerMarkets involve risks, and investments must be approached with caution. This article does not constitute personal investment advice, nor does it take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their particular situation. Invest accordingly, at your own risk.