Citi analysts expect a major change in the Federal Reserve's monetary policy, with the projection that the terminal interest rate will decrease to 3.25-3.50% by 2025.
In their latest note, the bank's analysts detailed expectations for the Federal Open Market Committee (FOMC) to signal the start of rate cuts, starting with a 25 basis point reduction in September.
"Fed officials are widely expected to keep rates steady on Thursday but should give a clear signal that the first 25bp rate cut will be implemented at the next meeting in September," Citi analysts said.
They explain that this potential rate cut is possible due to slowing inflation, which gives the Fed flexibility to cut rates without immediate inflationary pressure.
The Citi report highlighted that rising unemployment rates could push the Fed to act quickly in cutting rates. "The rising unemployment rate may increase the urgency to cut in the coming months," the analyst said.
They forecast a 75 basis point cut this year, followed by a steady 25 basis point cut at each subsequent meeting until the terminal rate target of 3.25-3.50% is reached in 2025.
In their analysis, Citi explained that recent data trends support the Fed's tendency for rate cuts. The core PCE inflation figure showed a decline, with the annual rate falling to 2.9% in the 2nd quarter. This slowdown, along with a reduction in housing inflation, "should finally give Fed officials the confidence to begin guiding toward a rate cut."
The path to reaching the terminal rate involves monitoring various economic signals and policy debates between Fed officials. However, as Citi analysts concluded, "The easiest path is for Fed officials to use the July meeting to build consensus and signal further tapering."
In summary, Citi's forecast of a terminal interest rate of 3.25-3.50% by 2025 depends on the Fed's strategic response to inflation and unemployment trends, with initial rate cuts expected as early as September.
