BlockBeats report, October 9: Citigroup believes that if the core PCE inflation rate remains consistently close to a 2% annualized pace, the tightening path following the September rate hike could shift. The key issue is whether the Fed’s previously anticipated future rate hikes will still occur, rather than an immediate pivot toward rate cuts. In a report, Citigroup economist Andrew Hollenhorst stated that the U.S. economy is not overheating: “We have not seen strong justification for further hikes. The September meeting minutes indicated that at least some officials did not view the economy as clearly overheating, but instead supported the September hike as a risk-management measure given upside inflation risks—implying that if underlying inflation continues to cool, the precautionary rationale for the September hike could quickly diminish. While most officials still expect one more hike before year-end, the minutes did not signal urgency for a consecutive hike in October.”
Citigroup focuses on the month-over-month core PCE rather than the still-elevated year-over-year figure: core PCE rose 0.2% month-over-month in August, with July revised to 0.1%, and year-over-year growth at 3.0%. If core PCE maintains an annualized rate of approximately 2% over several consecutive months, it should be viewed as inflation declining at a "sufficient pace" as desired by the Fed. Citigroup remains cautious about energy shocks transmitting to core inflation, noting that firms have not yet broadly passed on energy costs to core prices. The baseline scenario anticipates core inflation to remain low over the next four months and highlights downside risks for September core inflation. A "dovish surprise" is more likely to manifest as an earlier end to the hiking cycle than anticipated in the dot plot or by markets, rather than an immediate shift to rate cuts. Fed Chair Walsh has not yet defined a precise standard for "sufficient pace," but a core PCE annualized rate of around 2% over several consecutive months could serve as a reasonable benchmark.