Citigroup recently adjusted its forecast for when the U.S. Federal Reserve will begin cutting interest rates, pushing the expected start from this summer to September 2026.
This means that instead of seeing cuts in June or July, Citi now anticipates three 0.25% cuts in September, October, and December. The key takeaway here is 'later, not fewer.' The total number of expected cuts for the year remains the same, but the timeline has shifted. This change implies that borrowing costs, like those for mortgages and loans, will remain higher for longer through the summer than previously anticipated.
So, what prompted this change? The decision is rooted in a few key developments. First and foremost is the renewed risk of inflation. The ongoing war in Iran has pushed Brent crude oil prices above $100 a barrel, recently trading over $110. Higher oil prices translate directly to higher gasoline prices for consumers and increased transportation costs for businesses, which can fuel inflation across the economy. This makes it difficult for the Fed to justify cutting rates too soon.
Second, recent economic data has been solid enough to reduce the urgency for immediate rate cuts. While the labor market is showing signs of cooling, it isn't cracking. The March jobs report showed decent growth, and while hiring has slowed overall, the economy is not flashing recession warnings that would force the Fed's hand. At the same time, indicators like the ISM Manufacturing PMI suggest the manufacturing sector is expanding, which points to economic resilience.
Finally, the Fed's own communications support a more patient approach. At their March meeting, officials slightly raised their inflation forecast for 2026. Fed Chair Jerome Powell also acknowledged the "tension" between the Fed's goals of controlling inflation and maintaining full employment, signaling a cautious, data-dependent stance. In short, the combination of geopolitical uncertainty, stubborn inflation pressures, and a resilient economy makes a later start to rate cuts the more prudent path.
- FOMC (Federal Open Market Committee): The twelve-member committee within the Federal Reserve System that sets the nation's monetary policy, including interest rates.
- PCE (Personal Consumption Expenditures) Price Index: An indicator of inflation that measures the prices paid by consumers for goods and services. It is the Fed's preferred inflation gauge.
- NFP (Non-Farm Payrolls): A key economic indicator that represents the total number of paid U.S. workers of any business, excluding farm employees, government employees, private household employees, and employees of nonprofit organizations.