The Zhitong Finance App learned that after three consecutive months of slightly faster inflation than expected, Bank of America, Goldman Sachs Group, and Morgan Stanley have all lowered their interest rate cut expectations for this year. Meanwhile, Federal Reserve Chairman Powell also hinted on Tuesday that policymakers are in no hurry to relax their policies. However, Citigroup's Andrew Hollenhorst and Veronica Clark believe it is wrong to rush to make a judgment because the Federal Reserve is still worried that unexpectedly strong economic growth may come to a standstill. They both insist that interest rates will be cut by 25 basis points five times this year, and that Fed policymakers will not let go of signs of slowing inflation or economic weakness.

According to information, with the release of US inflation data for March, traders are beginning to anticipate that the Federal Reserve will not cut interest rates until the end of summer. Goldman Sachs's forecast for the Fed to cut interest rates was adjusted from one to five times, and then changed to two. Barclays has now returned to the Federal Reserve's position of cutting interest rates only once this year. Bank of America postponed the Federal Reserve's first rate cut from June to December.

Furthermore, Deutsche Bank economists have also joined the campaign to “lower expectations for the Fed to cut interest rates.” Deutsche Bank's team of American economists, led by Matthew Luzzetti, currently predicts that the Federal Reserve will only cut interest rates once in December this year. This forecast is a sharp drop from previous forecasts. Earlier this month, the bank anticipated that the Federal Reserve would cut interest rates four times this year, by 25 basis points each time.

The Deutsche Bank team also expects the Federal Reserve to cut interest rates twice in the first half of 2025, and then suspend interest rate cuts until 2026. They stressed that the actual number of interest rate cuts may be less than predicted, especially considering the uncertainty brought about by the US presidential election. If there are more disappointing inflation figures in the future, or if the election results introduce fiscal policies (such as trade or immigration policies) that may increase inflation, then the Federal Reserve will not cut interest rates this year or 2025.

It is worth mentioning that on Tuesday, Federal Reserve Chairman Powell said that although the overall US economy remains strong, the inflation rate has not returned to the central bank's target level, which indicates that interest rate cuts are unlikely in the short term.

Powell pointed out that the inflation rate continues to fall, but the rate of decline falls short of expectations, so the current policy should remain unchanged. “Recent data shows that economic growth is steady and the labor market continues to be strong, but there has been no further progress in returning to our 2% inflation target so far this year,” he said.

Echoing recent statements from central bank officials, he said current policy levels are likely to remain the same until inflation approaches the target.

However, in response to this, Citi's Hollenhorst said in an interview that it has always included sticky inflation expectations in this year's forecast, adding, “Our thoughts on America's economic trajectory in 2024 are very different from other forecasters. We think the Fed's reaction will be much more dovish than what the market expects.”

According to our understanding, the key point of their opinion is the upcoming core personal consumption expenditure (PCE) index, which is an inflation indicator favored by the Federal Reserve. Citigroup economists expect the index will show a cooling in price pressure. Economists say that if the index shows a monthly increase of only 0.25% in March and April (roughly the same level as February), the Federal Reserve will find “an opportunity to 'gradually' lower policy interest rates starting in June or July.”

Furthermore, Citi also expects that given the Federal Reserve's internal preference for easing policies, the central bank will pay more attention to signs of economic weakness (such as a slowing job market) rather than showing continued strong data.

Hollenhorst and colleagues wrote in a report on Wednesday: “Despite claims of a lack of 'urgency, 'Chairman Powell and the Commission are eager to begin lowering policy interest rates.” “The interest rate market seems to have underestimated the dovish nature of the Federal Reserve's reaction.”

Notably, the bank's forecast is in stark contrast to the overall sentiment in the financial market. US bond yields soared after last week's consumer price index report prompted investors to readjust their expectations. In the derivatives market, traders expect a 10% chance of cutting interest rates for the first time in June, and doubt whether the Federal Reserve will cut interest rates by 25 basis points twice this year.

However, it has been difficult for the market to predict the direction of the Federal Reserve over the past few years — underestimating both the extent of the Federal Reserve's austerity and the speed at which the Fed is reversing its policy. If Citigroup's economists are right, the recent shift may just be another misstep.

Editor/Somer