Following the unexpectedly hawkish shift at the June FOMC meeting, major Wall Street institutions have rolled back their earlier expectations for monetary easing. Yet Citigroup is holding its ground in a contrarian stance, maintaining that the Fed's next move will be a rate cut, not a hike. The bank's base case calls for a 25-basis-point cut in October, followed by additional cuts of 25 bps each in December and January 2027.
At the June FOMC meeting, nine of the 18 officials' dot plots pointed to a rate hike this year, far exceeding market and analyst expectations. Chair John Williams formally removed the phrase “easing bias” from the post-meeting statement and declined to provide any forward guidance. In response, swap markets advanced the first rate hike expectation from March 2027 to October this year, pricing a total of approximately 37 bps of tightening for the remainder of 2026. The two-year Treasury yield posted its largest single-day gain since March.
Citi's Three Pillars for a Rate Cut
Andrew Hollenhorst’s team at Citi builds its argument on three key pillars. First, the sharp decline in oil prices is eliminating a major upside risk to inflation. The 10-year breakeven inflation rate has fallen to levels last seen before the escalation of geopolitical conflicts. Citi argues that if Fed officials had more time to digest this energy price shift, the hawkishness of this FOMC meeting would have been significantly muted. As the effects of lower oil prices gradually show up in data, inflation readings are expected to moderate in coming months, pushing more officials toward a dovish stance before September and creating conditions for a rate cut by year-end.
The second pillar focuses on early signs of labor market weakening. Initial jobless claims and continuing claims have both been trending upward for several weeks. Citi notes that this pattern appeared in 2024 and 2025 and was followed by weaker monthly employment reports and rising unemployment — a key driver of Citi's call for a rate cut this year. The bank expects initial claims (week ending June 20) to stay around 224,000, with continuing claims edging up to 1.813 million, and the four-week moving average continuing to climb. While absolute levels remain low, a sustained upward trend would support the view of a gradually softening labor market.
The third pillar challenges the reliability of core PCE itself. Citi expects May core PCE month-over-month to come in at a hot 0.37%, while core CPI was just 0.21% — a significant divergence. The bank attributes this to specific factors: the core PCE index is heavily influenced by AI-related prices and is directly boosted by rising stock prices. May PPI data showed portfolio management fees surging 4.8% month-over-month, reflecting the rebound in equities from early-April lows to early-May highs, rather than genuine consumer price pressures. Comparing across indicators, the Dallas Fed trimmed mean PCE, San Francisco Fed cyclical PCE, Cleveland Fed median PCE, and core CPI all show a milder inflation picture than core PCE. Citi expects that as AI-related prices flatten in the second half of the year, the gap between core PCE and core CPI will narrow, with core PCE year-over-year declining from around 3.3% to 2.1%-2.2% by mid-2027.
Wall Street Firms Pivot to Hawkish Stance
The hawkish shock from Chair Williams prompted a cascade of Wall Street reversals. Deutsche Bank’s chief U.S. economist Matthew Luzzetti formally abandoned the bank's earlier easing forecast, updating its base case to two 25-bp rate hikes in September and December, pushing the federal funds rate to 4.1%, with no further moves in 2027 and the first rate cut not until the first half of 2028. Deutsche Bank also warned of upside hawkish risk: if Williams has publicly committed to “repairing” price stability and the committee fails to act promptly, his credibility could be tested — meaning a rate hike could come as early as July, and the total tightening needed to fully reverse last year’s consecutive rate cuts could reach 75 bps.
Goldman Sachs Vice Chairman Rob Kaplan, former president of the Dallas Fed, explicitly stated that if inflation data does not cool between now and September, a rate hike in the fall would be “a wise move.” He emphasized that the Fed rarely adjusts policy in isolated single moves; rate changes typically come in sequences of two or three actions. “If you act in September, you need to be prepared that there may be one or two more hikes,” Kaplan warned. His historical perspective, shaped by multiple monetary policy cycles, sent a clear cautionary signal to markets.