Fed Rate Cut Outlook by Citi Analysts

Citi analysts stated in a note Tuesday that the Federal Reserve is unlikely to skip rate cuts during its November meeting, despite recent labor market data that may have led some market participants to reconsider their expectations.

Citi mentioned: "Soft labor market data had markets pricing the Fed to cut at least 25 basis points at each meeting and possibly taking larger 50 basis point steps."

However, the analysts acknowledged that a stronger-than-expected 0.3% month-over-month increase in the core Consumer Price Index (CPI) last Thursday introduced a more hawkish narrative, complicating the outlook for rate cuts.

Citi expressed skepticism regarding the sustainability of recent job growth, indicating that the surge in government employment may not be ongoing. "We are skeptical that the strength in last Friday’s jobs report for September will continue," they noted.

Furthermore, they elaborated that the upcoming October jobs report is expected to reveal weakness, but market reactions may attribute this to temporary factors such as Hurricanes Milton and Helene, which could obscure the true state of the labor market until the November jobs report is released in early December.

Citi predicts that even in the face of stronger inflation, Fed officials are likely to pursue a strategy aimed at returning interest rates toward neutral levels. They believe that a minimum rate cut of 25 basis points will be warranted in November, stating,

"Despite a potentially stronger CPI reading this week, we do think inflation will remain subdued in coming months," said Citi. "Soft global demand should keep a lid on goods inflation, and a loosening labor market means less upside risk to non-shelter services."

"Shelter inflation has been 'sluggish' to come down, in the words of Chair Powell, but Fed officials will expect it to slow as long as rents and house prices rise more slowly."