In the wake of the Federal Reserve's unexpectedly hawkish June FOMC meeting, with major Wall Street institutions successively withdrawing their easing expectations, Citigroup has become the last bastion of rate-cut predictions. The team led by Andrew Hollenhorst at Citigroup maintains a baseline forecast diametrically opposed to market consensus: the Fed's next move will be a rate cut, not a hike, with a baseline scenario of a 25 basis point cut in October, followed by further 25bp cuts in December and January 2027.
At the June FOMC meeting, 9 of 18 Fed officials' dot plot points pointed to a rate hike this year, far exceeding market expectations. Chairman Warsh formally removed the "easing bias" language from the post-meeting statement and declined to provide any forward guidance. In response, swap markets quickly moved the expected first rate hike from March 2027 to October this year. Markets have now priced in approximately 37 basis points of rate hikes for the remainder of the year, and the 2-year Treasury yield posted its largest single-day gain since March after the meeting.
Wall Street Surrenders
Faced with this hawkish shock, Wall Street firms have shifted their positions. Deutsche Bank formally withdrew its easing forecast in its latest research note, predicting the Fed will hike rates once in September and once in December, for a total of 50bp, pushing the rate to 4.1%, and warning of a possible move as early as July. Goldman Sachs Vice Chairman and former Dallas Fed President Rob Kaplan warned that if inflation data remains stubborn, the Fed could resume rate hikes as early as autumn, likely in a sequence of two to three consecutive moves.
Citigroup's Core Argument 1: Falling Oil Prices Eliminate Inflation Upside Risk
Citigroup's first core argument for sticking with a rate-cut forecast stems from the sharp drop in oil prices. The bank argues that lower oil prices will drive down gasoline prices, thereby eliminating a major source of previous inflation upside. Market-based inflation expectations have already fallen in tandem with oil prices, with the 10-year breakeven inflation rate dropping to pre-conflict lows. Citigroup notes that if Fed officials had more time to digest the latest changes in energy prices, the hawkishness of this FOMC meeting would have been significantly reduced. As the effect of lower oil prices gradually shows up in the data, inflation readings in the coming months are likely to moderate, helping to push more Fed officials toward a more dovish stance before September.
Citigroup's Core Argument 2: Labor Market Weakness Signals
Citigroup's second core argument focuses on early signs of weakening in the labor market. Initial jobless claims and continuing claims have both been trending upward for several weeks. Citigroup points out that this pattern occurred in both 2024 and 2025, and was followed each time by a series of weak monthly employment reports and rising unemployment. The bank estimates that initial jobless claims for the week of June 20 will remain around 224,000, continuing claims will edge up to 1.813 million, and the 4-week moving average will continue to rise. Although current absolute levels are still not high, if the upward trend persists, it would be consistent with a gradual weakening of the labor market.
Citigroup's Core Argument 3: Core PCE Is an Outlier
Citigroup's third pillar for bucking the consensus is its skepticism about the core PCE data itself. The May core CPI rose only 0.21% month-over-month, a moderate reading; but Citigroup expects the upcoming May core PCE to come in as high as 0.37%, a notable divergence between the two. Citigroup argues that the current strength in core PCE has a special cause: the indicator is heavily influenced by AI-related prices and directly boosted by rising stock prices. May PPI data showed portfolio management fees surged 4.8% month-over-month, reflecting the rebound in stock prices from early April lows to early May highs, rather than true consumer price pressure. In a cross-comparison, the Dallas Fed trimmed mean PCE, the San Francisco Fed cyclical PCE, the Cleveland Fed median PCE, and core CPI all show a more moderate inflation trajectory than core PCE. Citigroup expects that as AI-related prices plateau in the second half of the year, the gap between core PCE and core CPI will narrow, and the overall inflation trend will become more supportive of policy easing.