At the June FOMC meeting, the Federal Reserve stunned markets with a hawkish tilt — nine of 18 officials projected a rate hike this year, Chair John C. Williams (actually the input says 沃什, likely a placeholder name) removed the "easing bias" language and offered no forward guidance. In response, Wall Street firms quickly pivoted. Deutsche Bank predicted two rate hikes in September and December totaling 50bp, while Goldman Sachs Vice Chairman Rob Kaplan warned of a potential series of two to three hikes starting in the fall. Yet Citi's Andrew Hollenhorst team stuck to its contrarian view: the Fed's next move is a cut, not a hike. Its base case is a 25bp reduction in October, followed by additional 25bp cuts in December and January 2027.
Citi's Logic 1: Falling Oil Prices Remove Inflation Upside Risk
Citi's first core argument for a rate cut comes from the sharp decline in oil prices. The bank argues that lower oil prices are dragging down gasoline costs, eliminating a major source of upside inflation. The 10-year breakeven inflation rate has fallen to levels seen before the conflict erupted. Citi noted that if Fed officials had more time to digest the energy price change, the hawkishness at the June FOMC would have been significantly less pronounced. As the effects of lower oil prices show up in data over coming months, inflation readings will moderate, pushing more officials toward a dovish stance before September and creating conditions for a rate cut by year-end.
Citi's Logic 2: Labor Market Weakness Mirrors Past Seasonal Patterns
Citi's second argument focuses on early signs of labor market softening. Initial jobless claims and continuing claims have trended higher for several weeks. This pattern appeared in both 2024 and 2025 and was followed by a series of weak monthly employment reports and rising unemployment — the key driver for Citi's rate cut call. For the week ending June 20, Citi expects initial claims to remain near 224,000, continuing claims to edge up to 1.813 million, and the four-week moving average to continue rising. While absolute levels remain low, a sustained uptrend would be consistent with a gradually softening labor market. On the broader economy, Citi's Q2 GDP tracking estimate stands at 2.5%; May retail sales control group rose 0.7% month-over-month, but real disposable income growth has slowed to near zero, and the saving rate remains low, suggesting downside risks to spending growth.
Citi's Logic 3: Core PCE Is an 'Outlier'; Inflation Picture Not Uniform
Citi's third contrarian pillar is a challenge to core PCE data itself. May core CPI rose only 0.21% month-over-month, but Citi expects the upcoming May core PCE to print a hot 0.37%, a significant divergence. Citi argues that the strength in core PCE is idiosyncratic: the metric is disproportionately affected by AI-related prices and directly boosted by stock market gains — the May PPI showed portfolio management fees surging 4.8%, reflecting the rebound in equities from early April lows to early May highs, not genuine consumer price pressure. Cross-sectionally, the Dallas Fed trimmed mean PCE, the San Francisco Fed cyclical PCE, the Cleveland Fed median PCE, and core CPI all show more moderate inflation trajectories than core PCE. Citi expects that as AI-related prices plateau in the second half, the gap between core PCE and core CPI will narrow. Core PCE year-over-year is projected to decline from its current 3.3% level to around 2.1%-2.2% by mid-2027.
Wall Street 'Surrenders': Deutsche Bank Sees Two Hikes, Goldman Warns of Clamping
Facing the hawkish shock from Chair Walsh (the input name), Wall Street institutions have rapidly reversed course. Deutsche Bank's chief US economist Matthew Luzzetti and team updated their inflation forecasts, raising core PCE estimates for end-2026 and 2027 to 3.2% and 2.5% respectively. Their baseline now expects two rate hikes of 25bp each in September and December, bringing the rate to 4.1%, with no changes in 2027 and rate cuts beginning only in the first half of 2028. Deutsche Bank also warned of upside hawkish risk: if Walsh's credibility is on the line, a hike could come as early as July, and the total tightening for the year could reach 75bp. Goldman Sachs Vice Chairman Rob Kaplan said that if inflation does not cool by September, a fall rate hike would be "prudent" and emphasized that policy changes rarely come as isolated moves — they typically occur in sequences of two to three actions.