Citi sees ‘sharp dovish pivot’ from Fed in coming months

Investing.com — Citi strategists anticipate a “sharp dovish pivot” from Federal Reserve Chair Jerome Powell and the FOMC in the coming months, following hawkish updates to the Fed’s latest Summary of Economic Projections (SEP).

The revised projections were more aggressive than expected, with the median 2025 “dot” now reflecting just 50 basis points (bps) of rate cuts next year, down from the 100 basis points implied in September.

Consensus had anticipated an upward revision to three cuts, rather than the two now projected. Moreover, the dissent from Cleveland Fed President Hammack, along with three nonvoting members signaling no cuts for 2024, further underlined the Fed’s hawkish stance.

The Fed’s base case assumes the unemployment rate will remain stable, allowing for a gradual reduction in rates as inflation eases from 3% toward the 2% target. However, Citi believes a “continued softening of the labor market is likely to become even more evident in coming months, keeping the Fed cutting at a faster pace than markets are pricing,” with just 50 basis points of cuts currently expected through mid-2026.

The firm highlights that Chair Powell appeared to hold a more dovish perspective than the broader committee. He emphasized that despite stronger core inflation readings in September and October, inflation remains on track to reach 2%.

Powell also repeatedly highlighted the labor market’s gradual softening, describing it as “in an orderly way” and softer than pre-pandemic levels by “so many measures.”

Still, he refrained from signaling that policy would need to become less restrictive to prevent excessive labor market loosening.

Powell estimated that job growth is currently running at a pace likely to raise the unemployment rate by approximately 0.1 percentage points every other month.

According to Citi strategists, this “creates a low bar for either job growth to slow or the unemployment rate to rise to provoke a faster pace of rate cuts.”

The unemployment rate, currently at 4.246% unrounded, continues to reflect a softening labor market. December’s unemployment rate can easily reach 4.4% and likely rise above 4.5% in the coming months, exceeding the Fed’s 2025 year-end SEP projection of 4.3%.

Coupled with softer core inflation in November and anticipated further declines in December, strategists believe the conditions would leave Fed officials with little reason not to implement rate cuts at each upcoming meeting.