Citigroup Delays Fed Rate Cut Outlook Amid Strong Jobs and Rising Inflation Risks
Citigroup has pushed back its expectations for Federal Reserve rate cuts, now expecting easing to begin later in the year as stronger-than-expected U.S. job growth and rising inflation risks reshape the outlook.
In a recent note, Citi said it now sees 75 basis points of cuts starting in September, rather than earlier expectations for June and July. The shift comes after solid March hiring data, boosted by seasonal factors and the end of a healthcare strike.
Despite the resilience in employment, Citi warned that labor market weakness is still building, particularly as geopolitical tensions — including the ongoing Iran conflict — add economic uncertainty.
Labor Market Signals and Fed Dilemma
The Federal Reserve is facing a more complex backdrop. A recent Fed report highlighted slowing labor force growth, driven by lower immigration and an aging population — trends that could push job growth toward zero in the near future.
This creates a delicate balance: while hiring remains firm for now, underlying structural weakness could emerge later, influencing the timing of rate cuts.
At the same time, traders have largely priced out near-term rate cuts, reflecting a shift in expectations following recent macro developments.
Inflation Pressures Intensify
Rising energy costs are adding another layer of pressure. Oil market volatility — particularly around the Strait of Hormuz — has pushed U.S. gas prices above $4 per gallon.
John Williams, President of the New York Fed, noted that higher energy prices are impacting both inflation and consumer spending, squeezing household budgets already under strain.
Political Tensions Add Uncertainty
The rate outlook is also being shaped by political developments. Former Fed official Kevin Warsh is set for a nomination hearing to potentially replace Jerome Powell as Fed Chair.
Meanwhile, an ongoing probe involving Powell has added further uncertainty, with political pressure mounting around interest rate decisions.
Bottom Line
Citigroup’s revised outlook reflects a shifting macro landscape where strong short-term data clashes with longer-term risks. With inflation still a concern and labor dynamics evolving, the Fed may delay rate cuts — leaving markets in a wait-and-see mode heading into the second half of the year.
