Citi Forecasts 200 Basis Points in Rate Cuts

But the Fed has also said it's not in a rush to make cuts.

Citi Research analysts have been making a prediction about rate cuts that seems to run counter to any other estimates, including those of the Federal Reserve. At the beginning of July, Fed Chair Jerome Powell made a balanced statement between dovish and hawkish monetary strategy.

And then on Tuesday in congressional testimony, Powell said that the Federal Open Market Committee doesn't expect "it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent." First quarter data didn't provide them with the evidence for "such greater confidence," and the Fed typically looks for periods of upward a year.

But Citi seems sure that the Fed will make a total of 200 basis points over eight FOMC meetings, according to Fortune. "A continued softening of activity will provoke cuts at each of the subsequent seven Fed meetings, in our base case," Citi wrote. They're betting on the first rate cut coming in September.

Their evidence is all recent, like some easing of inflation, whether Consumer Price Index from the Bureau of Labor Statistics or Personal Consumption Expenditures from the Bureau of Economic Analysis. The Institute for Supply Management's service-sector data swung into a negative range. Employment growth has slowed, and unemployment rose to 4.1%. There was a drop of 49,000 temporary service jobs. According to Fortune, Citi wrote that it was "the type of decline that is typically seen around recessions as employers begin reducing labor with the least strongly attached workers."

They, as some others have, pointed to economist Claudia Sahm's "Sahm rule" that is an indicator of an existing recession. On Tuesday, Sahm wrote about Powell's testimony and noted, "Nothing about June (including the Sahm rule) on Friday sounded alarms." Citi said that if things kept moving as they have, the indicator might be triggered in August.

The question is what could drive the Fed to make the number of cuts, and total value (25 basis points per meeting), that Citi is predicting. One possibility is that the economy improves to such a degree that the soft landing occurs with a recession-less full recovery. But even then, That would be an aggressive set of rate cuts, assuming that low rates were a new normal.

Instead, the other reason for such a prediction would be an oncoming recession. As Fortune pointed out, Citi Chief U.S. Economist Andrew Hollenhorst has predicted a hard landing and one where Fed rate cuts couldn't rescue it. If so, that would mean an economic crunch that would likely be worse than any rate reduction benefit.

Source: GlobeSt/ALM