Citibank Predicts Fed 'Dovish Surprise' as Core Inflation Approaches 2%

Hu 火星 Finance reports that on October 9, Citigroup stated that if the annualized growth rate of core PCE remains near 2% in the short term, the tightening path following the September rate hike could change. The key issue is whether the Fed’s previously anticipated future rate hikes will still occur, rather than an immediate shift toward rate cuts. In its report, Citigroup economist Andrew Hollenhorst noted that the U.S. economy is not overheating: “We have consistently seen no strong justification for further rate hikes. The September meeting minutes revealed that at least some officials did not view the economy as clearly overheating, but rather agreed to the September hike as a risk-management measure given upside risks to inflation—implying that if underlying inflation continues to cool, the precautionary rationale for the September hike could rapidly weaken. Most officials still expect one more rate hike before year-end, but the minutes did not indicate urgency for a consecutive hike in October.” Citigroup is focusing on month-over-month core PCE rather than the still-elevated year-over-year figures: core PCE rose 0.2% month-over-month in August, revised up from 0.1% in July, and increased 3.0% year-over-year in August. If core PCE maintains an annualized rate of approximately 2% over several consecutive months, it should be viewed as inflation declining at the “sufficient pace” required by the Fed. Citigroup also remains cautious about energy shocks transmitting into core inflation, noting that firms have not yet broadly passed energy costs onto core prices. The baseline scenario anticipates core inflation remaining low over the next four months and highlights downside risks to September’s core inflation data. A “dovish surprise” is more likely to manifest as an earlier-than-expected end to the hiking cycle than an immediate pivot to rate cuts. Fed Chair Powell has not yet defined what constitutes “sufficient pace,” but a sustained core PCE annualized rate of around 2% over several months could serve as a reasonable benchmark.