Citibank still reckons rate cuts in June likely despite recent Fed hawkish tone

The market had been expecting policy rate reductions as early as March, but January's unexpectedly strong core inflation changed expectations, and now there is concern that any cuts will occur this year.

The comments made by Federal Reserve Chair Powell, however, suggest that the Fed's position has not altered much in spite of this noticeable change in market opinion.

Above all, according to Citi economists in a note published on Thursday, the head of the central bank is still emphasising the expected slowdown in core PCE inflation year over year, with projections indicating a drop to about 2.5% by May, setting up the Fed for a likely rate decrease in June.

Powell remained consistent with the prior Fed projection, while Minneapolis Fed President Kashkari offered a substantial update to his forecast.

He expressed doubts about the December Economic Projections' applicability in light of the recent strong employment and inflation data, which called for 75 basis points in cutbacks.

Citi, on the other hand, does not think Kashkari's opinions will change the Fed's course.

"At this time, we believe Kashkari is an extreme outlier who does not accurately reflect the opinions of the committee. Even if activity data remains steady, we envision the Fed cutting in June as long as monthly core PCE inflation comes in between 0.2% and 0.3% MoM, according to Citi economists.

"The Fed's case for raising rates due to slower inflation would become more difficult to make should core PCE inflation consistently print closer to 0.4%MoM," they continued.

(Sources: investing.com, reuters.com)