Citi analysts stated in a report that market expectations for Federal Reserve policies may rise significantly. This prediction comes ahead of the decision-making on Wednesday, where an increase of 25 basis points is anticipated.
Citi's Predictions
In the baseline scenario, the bank expects the interest rate hike to be "moderate" and accompanied by guidance that does not indicate further increases. Citi believes that Federal Reserve Chair Kevin Warsh will describe this action as a "minor adjustment" or "calibration" and may suggest that if inflation approaches the target, there is no need for further hikes.
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Midpoints and Economic Forecasts
Citi believes that parts of the Federal Reserve's updated economic forecasts should reinforce this perception, as the midpoints are likely to indicate only one more increase this year, with cuts starting in 2027. These forecasts align with the view that policy rates close to 4 percent are somewhat restrictive, and this restriction should be lifted with a decrease in inflation.
Analysts also noted that core PCE inflation forecasts are likely to be updated from June due to methodological changes. However, Citi warned that the biggest factor in determining the overall tone and the most unpredictable aspect is how Warsh speaks about this increase.
The "hawkish" risk means that he may simply emphasize that there is still "much work to be done" without providing near-term guidance. Markets could interpret this as a signal that further increases are likely in the October and December meetings, and there is a risk of more hikes until 2027.
Citi also pointed out that Warsh's tendency to provide little guidance gives more room for markets to price in more hawkish policies than what the bank expects.
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