Citi analysts suggested in a recent note that the Federal Reserve is likely to proceed with a rate cut during its November meeting, despite conflicting economic signals, including stronger-than-anticipated inflation data.
The bank’s analysts pointed out that recent labor market data had initially led the markets to expect rate cuts of 25 basis points in upcoming meetings, with some speculating on potential cuts of 50 basis points.
However, a higher-than-expected 0.3% increase in the core Consumer Price Index (CPI) has complicated the outlook, sparking discussions of a more cautious approach by the Fed.
Citi analysts also noted their skepticism about the sustainability of the recent job growth, which has been bolstered by a surge in government employment. They believe the strength seen in the September jobs report might not last in future readings.
“We doubt that the robust labor market data will be sustained,” the analysts wrote, adding that upcoming reports, including the October jobs data, are likely to reflect weaker growth. They also mentioned that temporary factors, such as the impact of recent hurricanes, could distort the data until clearer trends emerge in the November report, which is due in early December.
Despite these mixed signals, Citi believes the Fed will still push forward with at least a 25-basis-point rate cut in November, even if inflation surprises to the upside.
“Although the recent inflation numbers may appear stronger, we anticipate a moderation in the coming months,” Citi stated. The firm cited softening global demand and a cooling labor market as factors that should keep inflationary pressures in check.
While some inflation categories, such as shelter costs, have been slower to decline, Citi expects this trend to shift as rental and housing prices continue to stabilize.
This position highlights Citi’s confidence that the Fed will pursue a cautious easing of rates, aiming to align interest levels closer to a neutral position without sparking excessive inflationary risks.
