In the wake of the June FOMC meeting's unexpectedly hawkish outcome and a wave of Wall Street institutions retracting their easing forecasts, Citigroup is holding its ground with a contrarian prediction: the Federal Reserve will still cut rates this year. The baseline scenario, according to Andrew Hollenhorst's team at Citi, calls for a 25-basis-point rate cut in October, followed by additional 25bp cuts in December 2026 and January 2027. Citi insists the next move is a cut, not a hike.
During the June FOMC meeting, nine out of 18 officials penciled in a rate hike this year, far exceeding market and analyst expectations. Chair Warsh removed the "accommodative bias" language from the post-meeting statement and declined to provide any forward guidance. Swap markets quickly pulled forward the first expected hike from March 2027 to October 2026, and the market now prices roughly 37bp of tightening for the remainder of 2026. The two-year Treasury yield posted its largest single-day gain since March.
Citi’s Logic #1: Falling Oil Eliminates Upside Inflation Risk
Citi’s first core argument hinges on the sharp decline in oil prices. The bank argues that lower oil will drag gasoline prices down, removing a key source of upward inflation pressure. Market-based inflation expectations have already fallen alongside oil, with the 10-year breakeven rate dropping to pre-conflict lows. Citi believes that if Fed officials had more time to digest the latest energy price changes, the hawkish tone of the June FOMC would have been significantly muted. As the effects of lower oil prices feed into upcoming data, inflation readings are expected to moderate in the coming months, potentially pushing more officials toward a dovish stance before September and creating conditions for a rate cut before year-end.
Citi’s Logic #2: Labor Market Weakness Follows Seasonal Patterns
Citi’s second pillar focuses on early signs of labor market deterioration. Initial jobless claims and continuing claims have both been trending higher for several weeks. Citi notes that this pattern appeared in both 2024 and 2025, each time followed by a series of weak monthly employment reports and a rise in the unemployment rate—the latter being a key driver for Citi’s rate-cut call. The bank expects initial claims for the week ending June 20 to stay near 224,000, with continuing claims edging up to 1.813 million, while the four-week moving average continues to rise. Although absolute levels are still modest, a sustained uptrend would align with a gradually softening labor market. On the broader economy, Citi’s Q2 GDP tracking estimate is 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 are building.
Citi’s Logic #3: Core PCE Is an Outlier—The Inflation Picture Is Not Uniform
Citi’s third contrarian pillar questions the reliability of core PCE data itself. May core CPI rose only 0.21% month-over-month, a mild reading, but Citi estimates that the upcoming May core PCE print will come in at a hot 0.37%, creating a significant divergence between the two. Citi argues that core PCE’s current strength is idiosyncratic: it is heavily influenced by AI-related prices and directly boosted by rising stock prices. May PPI data showed portfolio management fees surging 4.8% month-over-month, mainly reflecting the recovery of equity prices from early-April lows through early-May highs, rather than genuine consumer price pressures. Cross-comparisons with the Dallas Fed trimmed-mean PCE, the San Francisco Fed cyclical PCE, the Cleveland Fed median PCE, and core CPI all show a much milder inflation trajectory than core PCE. Citi sees core PCE becoming increasingly an outlier among inflation indicators, not a reliable signal of broad consumer price pressures. As AI-related prices level off in the second half of the year, Citi expects the gap between core PCE and core CPI to narrow, making the overall inflation picture more supportive of policy easing. Under Citi’s forecast path, year-over-year core PCE would decline from around 3.3% currently to 2.1%–2.2% by mid-2027.
Wall Street Surrenders: Deutsche Bank Sees Two Hikes, Goldman Warns of a Series
Nevertheless, the hawkish shock from Warsh has prompted other Wall Street institutions to flip. Deutsche Bank’s chief US economist Matthew Luzzetti’s team explained that their previous reluctance to revise up forecasts stemmed from two uncertainties: the highly uncertain economic outlook due to the Iran situation, and the lack of clarity on new Fed Chair Warsh’s reaction function. The June FOMC outcome removed both concerns. Deutsche Bank sharply raised its inflation forecasts, lifting its 2026 and 2027 core PCE estimates to 3.2% and 2.5% respectively. The new baseline calls for rate hikes in September and December—50bp in total—bringing the fed funds rate to 4.1%, followed by no action in 2027 and the first cut in the first half of 2028. Deutsche Bank also flags a hawkish tail risk: if Warsh has publicly committed to "repairing" price stability but the committee does not act soon, his credibility could be tested, meaning a rate hike as early as July is possible. To fully unwind the cumulative easing from last year’s consecutive cuts, the total tightening could reach 75bp over the year.
Goldman Sachs Vice Chairman Rob Kaplan explicitly stated that if inflation data do not cool by September, a rate hike in the fall would be "prudent." He emphasized that Fed policy moves rarely occur as isolated actions; shifts typically come in series of two or three. "If they act in September, you should be prepared for one or two more follow-up hikes," Kaplan warned. Drawing on his experience across multiple monetary policy cycles, his caution served as a warning to markets.