Citigroup has pushed back its expected timeline for Federal Reserve interest-rate reductions, citing stronger-than-anticipated payroll gains in March and persistent inflationary pressures. In a research note dated April 3, the Wall Street firm adjusted its forecast for a cumulative 75 basis points of rate cuts to occur in September, October and December instead of the earlier June, July and September sequence it had projected.
The firm said its view remains that signs of a softening labor market will lead to rate cuts later in the year. However, it added that recent and upcoming data weigh toward a later starting point for easing. As the note states: "We continue to think signs of a weakening labor market will result in cuts later in the year. But the timing of upcoming data suggests a later start to rate cuts than we had previously been expecting," Citigroup said.
Citigroup's timing adjustment follows a rebound in U.S. job growth in March, when payrolls increased by more than expected. The firm noted specific drivers for that rebound, including the conclusion of a strike by healthcare workers and seasonal warming that can affect hiring patterns.
At the same time, Citigroup flagged growing downside risk to the labor market stemming from a war with Iran that currently has no clear end in sight. The bank projects that weaker hiring will push the unemployment rate higher during the summer months, a pattern it says resembles movements seen over recent years.
Implications and context
- Citigroup's revised path delays the start of Fed easing from early summer into the autumn and year-end months.
- The change is driven by stronger-than-expected March payrolls and ongoing inflation concerns cited by the firm.
- Cited geopolitical risk - a war with Iran - is noted as a factor that could exacerbate downside labor-market pressure.
Citigroup's update underscores shifting expectations about the calendar for policy easing while maintaining that labor-market weakness remains the key condition that would trigger cuts later in the year.