Will the Federal Reserve cut interest rates again? Tonight's data is crucial.
Under the dual pressures of geopolitical conflicts and a rebound in inflation, market expectations for Federal Reserve interest rate cuts are experiencing significant swings. The core of the current market debate is: Will elevated energy prices trigger persistent inflation, or will they erode consumer demand and thereby force the Fed to cut rates?
On April 21, according to Wind Trading Desk news, Citi’s latest research report provided a clear bullish rationale for rate cuts, believing that oil supply disruptions are only temporary disturbances and the path towards rate cuts remains clear despite setbacks; meanwhile, Deutsche Bank poured cold water by warning that the Fed’s policy is already in a neutral position and is expected to indefinitely maintain current interest rates.
As the two major investment banks clash in their views, the upcoming March retail sales data will become a critical touchstone to break the stalemate. This data will not only reveal the true destructive power of high oil prices on core consumption, but will also directly determine the Fed's near-term policy path.
Citi: Geopolitical shocks are temporary, the direction of rate cuts unchanged
Despite continued impact from geopolitical developments, Citi firmly believes that the path towards lower interest rates and a more dovish Fed policy still exists.
The core logic of this judgment is: The shock to oil supply from the Hormuz Strait situation is increasingly likely to be temporary rather than a sustained source of inflation. There was news on April 18 that the Hormuz Strait would reopen, though it was later questioned, but both Treasury yields and oil prices have retreated from Thursday’s highs and stayed at lower levels—this in itself is the market pricing in the “temporary shock” scenario.
The report points out, Citi's logic is clear: Geopolitical conflict is temporary → Oil price shock is not lasting → Inflation pressure does not spread → Fed has conditions to return to rate cut path.
Additionally, a series of underlying economic data tracked by Citi show subtle changes in the macro financial environment:
Liquidity & Financial Conditions: Fed reverse repurchase (RRP) operations have dropped significantly to near zero; at the same time, recent financial conditions are tightening and mortgage rates are again trending upward.
Labor Market: Recent Indeed job vacancy data shows sideway consolidation, but initial jobless claims remain at low levels overall.
Funding: So far this year, individual tax refunds (total in billions of dollars) are slightly higher than the same period last year.
Tonight’s Touchstone: Why is the March “control group” retail sales data crucial?
As rate cut expectations swing, the soon-to-be-released March retail sales data will provide investors with first-hand clues about how much elevated gasoline prices have reduced consumer spending in other categories.
Citi emphasizes that investors must “strip away the surface” when interpreting the data. Due to rising gasoline prices, nominal retail sales in March are bound to surge. However, what truly determines Fed policy direction is the “control group” sales data.
The report notes this data excludes sales from gas stations and certain categories, making it more realistic and accurate in reflecting whether high oil prices have caused weakness in consumer spending elsewhere. If “control group” data unexpectedly weakens, it will strongly confirm that high inflation is eroding demand, thereby providing crucial data support for the Fed’s rate cut logic.
Deutsche Bank’s Cold Water: Policy has reached neutral, Fed may stay put indefinitely
In stark contrast to Citi’s optimistic expectations, Deutsche Bank gave a highly cautious outlook for rate cuts. Deutsche Bank’s research report clearly states: The Fed is expected to indefinitely maintain current interest rates, as the current policy is already at a neutral position.
Deutsche Bank’s pessimism is mainly based on several core points:
Stagnation in inflation reduction: Broad inflation indicators show that progress on fighting inflation in the US has stalled.
Officials turn hawkish: Deutsche Bank’s tracking of Fed official statements shows that Waller and Miran have adopted a more hawkish tone, while most officials continue to believe that the current policy stance is “well positioned.” Specifically:
Waller: More hawkish. He points out that if the Middle East conflict persists, it will block the path to rate cuts; a series of shocks (tariff plus oil price) could lead to more lasting inflation rises; he also emphasizes that core inflation excluding tariff effects is near 2%, but there is vulnerability in the labor market;Miran: Currently the most dovish voice, supports 3 or even 4 rate cuts this year, believes the war has not changed the inflation outlook for 12-18 months out, and that oil price shock is temporary;Williams: Believes policy is “just at the right place,” raises the 2026 inflation forecast to about 2.75%, lowers 2026 economic growth forecast to 2%-2.5%;Hammack: States clearly that interest rates will “remain unchanged for quite a long time”;Goolsbee: Warns that if oil prices persist above 90 dollars/barrel, it could spill over to other prices; little chance of further rate cuts in 2026, rate cuts may have to wait until 2027;Daly: Believes current policy is in a “very good position,” if oil price shocks last until year-end, a zero rate cut market pricing would not be surprising.
The Fed’s March meeting minutes likewise show that most officials believe the process of inflation returning to the 2% target will be delayed; some even discussed the necessity of adding “two-way risks” to the meeting statement, suggesting a rate hike is not fully excluded.
Deutsche Bank's hawk-dove rating for Fed officials shows that the 2026 voting committee has an average rating of 2.8 points (1 being most dovish, 5 being most hawkish), overall leaning neutral to slightly dovish, but dovish voices are clearly in the minority.
Market pricing reversed completely: Faced with persistent inflation pressure and strong economic resilience, market expectations have radically changed. According to Deutsche Bank data, the market now prices in “zero rate cuts” for the whole of 2026, with a single rate cut only expected in summer 2027.
Deutsche Bank forecasts, under the baseline scenario, that the federal funds rate will remain at 3.63% throughout 2026-2028, with no rate cuts all year.
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The above highlights are from Wind Trading Desk.
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