After the Federal Reserve's unexpectedly hawkish June FOMC meeting, major Wall Street institutions have withdrawn their easing expectations, but Citigroup stands firm in its contrarian view that a rate cut this year remains highly probable, setting October as the base case for restarting the easing cycle.
At the June FOMC meeting, nine of the 18 Fed officials' dot plot indicated a rate hike this year, far exceeding market and analyst expectations. Chair John Williams formally removed the "accommodative bias" language from the post-meeting statement and declined to provide any forward guidance. In response, the swap market quickly brought forward the first rate hike expectation from March 2027 to October this year, and the market now prices in about 37 basis points of rate hikes for the remainder of the year. The 2-year Treasury yield posted its largest single-day gain since March after the meeting.
Citi's Three Core Arguments: Falling Oil, Weak Labor, Outlier Core PCE
The Andrew Hollenhorst team at Citi maintains a base case opposite to the market: the next move is a rate cut, not a hike, with a 25-basis-point cut in October, followed by another 25 bps in December and January 2027. Citi's core argument rests on three pillars: the sharp decline in oil prices is removing the main upside risk to inflation; the rising trend in initial jobless claims mirrors the seasonal weakening patterns seen in 2024 and 2025; and core PCE is increasingly appearing as an "outlier" among inflation metrics, with its strength mainly reflecting stock price gains rather than broad consumer price pressures.
First, falling oil prices are eliminating the upside risk to inflation. Citi believes lower oil will drag gasoline prices down, and market-based inflation expectations have already eased with oil, with the 10-year breakeven rate falling to pre-conflict lows. If Fed officials have more time to digest this energy price development, the hawkish tone of the June FOMC meeting would have been significantly less pronounced. As the effect of lower oil prices gradually shows up in data, inflation figures will likely moderate in coming months, helping to shift more officials toward a dovish stance before September and creating conditions for a year-end rate cut.
Second, weakening labor market signals are repeating seasonal patterns from prior years. Initial jobless claims and continuing claims have both risen for weeks. Citi notes that this pattern occurred in both 2024 and 2025, followed by a series of weak monthly employment reports and rising unemployment rates. Citi expects initial claims (week ending June 20) to remain around 224,000 and continuing claims to edge up to 1.813 million. While absolute levels are still low, a sustained uptrend would be consistent with a gradual cooling labor market. On the broader economy, Citi tracks Q2 GDP growth at 2.5%. May retail sales control group rose 0.7% month-over-month, showing resilience, but real disposable income growth has slowed to near zero, and the saving rate remains low, hinting at accumulating downside risks to spending growth.
Third, core PCE is an "outlier" and the inflation picture is not uniform. The May core CPI rose only 0.21% month-over-month, but Citi expects May core PCE to rise as high as 0.37%, a significant divergence. Citi argues that core PCE's strength is idiosyncratic: it is highly influenced by AI-related prices and directly boosted by stock price gains—May PPI data showed portfolio management fees surging 4.8% month-over-month, reflecting the rebound in stock prices from early April to early May, not true consumer price pressure. Comparing across measures, the Dallas Fed trimmed mean PCE, San Francisco Fed cyclical PCE, Cleveland Fed median PCE, and core CPI all show more moderate inflation trends than core PCE. Citi expects the gap between core PCE and core CPI to narrow as AI-related prices plateau in the second half of the year, with core PCE year-over-year growth gradually falling from around 3.3% currently to the 2.1%-2.2% range by mid-2027.
Wall Street Surrenders: Deutsche Bank Forecasts Two Hikes, Goldman Warns of Consecutive Tightening
Facing Chair Williams' hawkish impact, Wall Street institutions have changed their stance. Deutsche Bank's chief US economist Matthew Luzzetti and team said in a report that the June FOMC outcome resolved two major uncertainties: the highly uncertain economic outlook due to the Iran situation and the unclear reaction function of new Chair Williams. Deutsche Bank sharply raised its inflation forecasts, lifting core PCE expectations to 3.2% by end-2026 and 2.5% by 2027, and updated its base case: the Fed will hike in September and December, 25 bps each, totaling 50 bps to bring rates to 4.1%; then hold through 2027 before starting cuts in the first half of 2028. Deutsche Bank also warned of hawkish risk: if Williams has publicly committed to "fixing" price stability and the committee does not act promptly, his credibility will be tested—meaning a July hike is possible, and to fully reverse the easing effect of last year's consecutive cuts, the total tightening this year could need to reach 75 bps.
Goldman Sachs Vice Chairman and former Dallas Fed President Rob Kaplan stated clearly that if inflation data does not cool between now and September, a fall rate hike would be "wise." He stressed that Fed policy adjustments rarely come as isolated moves; rate changes typically come in series of two to three actions: "If you act in September, you need to be prepared for maybe one or two more rate hikes." Kaplan, who has experienced multiple monetary policy cycles, offered a historical warning that sounded an alarm for markets.