Citi Predicts: Fed to Slash Interest Rates Eight Times Consecutively from September, Targeting 3.25-3.5% by 2025

Citi analysts forecast in a report this month that the U.S. Federal Reserve will strongly hint at an interest rate reduction in September during this week’s rate meeting. The analysts predict that from September onwards, the Fed will consecutively lower rates by 25 basis points eight times, ultimately achieving a target rate of 3.25 to 3.50% by July 2025. This series of cuts is expected to have a significant impact on the economy and financial markets.

• Will the U.S. Federal Reserve’s terminal interest rate fall to between 3.25-3.5% by 2025?
• Is the rising U.S. unemployment rate signaling an economic recession?
• Will a September Interest Rate Cut Facilitate a Successful Economic Soft Landing?

Will the U.S. Federal Reserve’s terminal interest rate fall to between 3.25-3.5% by 2025?

Reports from Fortune and Investing.com reveal that analysts at Citi are forecasting a significant interest rate cut by the Federal Reserve. Starting in September of this year, the Fed is expected to slash rates by one point, followed by a total reduction of 75 basis points within the year. This trend is predicted to persist, with subsequent cuts of 25 basis points at each Fed meeting until July 2025. The ultimate goal is to achieve a federal funds rate ranging from 3.25% to 3.50% by March of that year, maintaining this level throughout the remainder of 2025.

This series of cuts would mark a notable 200 basis point decrease from the current federal funds rate. Andrew Hollenhorst, Citi’s Chief Economist for the U.S., highlights that recent economic weakness and data indicating a slowdown in inflation support the need for such measures. Specifically, he points to the deceleration in CORE PCE inflation figures and a decline in the housing inflation rate as factors that should bolster Fed officials’ confidence in pursuing rate cuts.

Furthermore, analysts emphasize that rising unemployment rates may prompt swift action from the Federal Reserve. “Increasing unemployment could heighten the urgency for interest rate cuts in the upcoming months,” they state.

These developments, coupled with the dovish statements made by Federal Reserve Chairman Jerome Powell this month, suggest that the inaugural rate cut is likely to be implemented in September. According to their base case scenario, the analysts anticipate that continued economic sluggishness will prompt rate reductions at each of the Fed’s next seven meetings.

Is the rising U.S. unemployment rate signaling an economic recession?

Citi analysts, led by Hollenhorst, have issued a warning regarding employment data. According to their report, the Institute for Supply Management’s (ISM) services index, also known as the non-manufacturing PMI, has unexpectedly turned negative. Simultaneously, the latest monthly employment report indicates an increase in the unemployment rate to 4.1%. This shift raises concerns about a potential weakening in economic activity and underscores the necessity for swift interest rate cuts. The report further highlights other concerning trends in the jobs market, specifically a downward revision of previous months’ data and a notable decrease of 49,000 temporary services jobs in June. Citi characterizes this decline as a recessionary indicator. Moreover, if the unemployment rate persists in its upward trajectory, the report cautions that the renowned “Sahm Rule” recession indicator may be activated in August. This comprehensive analysis underscores the fragility of the current economic situation and the urgent need for policy adjustments to mitigate potential risks.

Will a September Interest Rate Cut Facilitate a Successful Economic Soft Landing?

As Wall Street consensus shifts towards a potential soft landing for the U.S. economy, economist Hollenhorst remains steadfast in his pessimistic outlook. He has consistently cautioned that the nation is on a path towards a hard landing, emphasizing that the Federal Reserve’s interest rate cuts may not be adequate to avert this scenario. In a recent interview with Bloomberg, Hollenhorst highlighted that while the Fed’s rate hikes had a lesser-than-expected impact on economic slowdown, he anticipates that rate cuts will similarly have a limited effect on economic stimulation. Furthermore, with 10-year Treasury yields already dipping below 2-year yields, the scope for further decline is constrained, particularly as deficits and inflation continue to mount, exerting upward pressure. Hollenhorst emphasized that most economic activities are more sensitive to longer-term yields like the 5-year and 10-year, rather than the overnight policy rate, raising questions about the extent to which lower policy rates can effectively stimulate the economy.

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