- Citi has postponed its forecast for the Federal Reserve's first interest rate cut from September 2026 to October, marking a reevaluation of the moderate stance held by major brokers in the market, fully shifting to address the Fed's hawkish position.
- New Federal Reserve Chairman Kevin Warsh maintained the benchmark interest rate at the policy meeting and announced the cancellation of forward guidance, prompting a repricing of the monetary policy reaction function in global financial markets.
- According to the CME's FedWatch tool, traders have rapidly increased the pricing probability of a rate hike in September from 27% the previous day to 50%, significantly reconstructing expectations for the tightening cycle.
Dovish Camp Retreats as Rate Cut Timeline Delayed
As a representative institution long advocating for the Fed to initiate easing policies earlier, Citi has revised its interest rate path outlook in its latest report. The bank now expects the Fed to cut rates by 25 basis points in October and December 2026, with a third cut in January 2027. Previously, Citi's official forecast was for consecutive cuts in September, October, and December. This marginal change reflects the top Wall Street institutions' need to delay their policy grace period expectations in the face of stubborn inflation pressures and the Fed's hawkish policy shift. With nearly half of the Fed's policymakers indicating at Wednesday's meeting that further rate hikes may be needed this year, Wall Street's policy consensus is converging towards a higher, longer rate environment.
Warsh's Policy Review Ends Forward Guidance
In his first press conference as the new Fed Chairman, Kevin Warsh demonstrated an aggressive policy review style. Warsh clearly stated that forward guidance is not suitable for the current economic situation and refused to provide any institutional hints on future policy actions. This statement effectively ended the traditional communication mechanism the Fed has relied on for years to stabilize market expectations. Deutsche Bank analysts noted that no longer overly relying on forward guidance may give the Fed more freedom to tighten monetary policy quickly, significantly increasing the marginal risk of rate hikes at future policy meetings. The rise in policy flexibility also means the market will face a higher information vacuum period.
Traders Reassess Rate Path as Hike Risks Rise
Following the abolition of forward guidance, the financial derivatives market was the first to make dramatic adjustments. Pricing results in the short-term interest rate derivatives market show that the game between maintaining rates or hiking in September has reached a stalemate. Institutions like Nomura and Bank of America, which previously predicted no easing measures by the Fed in 2026, have pointed out that given the hawkish signals from the Fed's dot plot or decision-makers' forecasts, the real risk of further raising the benchmark rate this year is continuously accumulating. If subsequent inflation month-on-month growth does not show a clear downward trajectory, the probability of the Fed reopening the rate hike window may further break through the current breakeven point.
Data-Driven Era Increases Market Uncertainty Premium
The institutional shift in communication mode is forcing a fundamental change in market analysis paradigms. JPMorgan emphasized in its briefing that with the retreat of official forward guidance, policymakers' public speeches and each macroeconomic data release will carry far more asset pricing weight than before. Barclays stated that the shift from guidance-based communication to purely data and event-driven communication significantly increases the uncertainty in understanding the Fed's policy reaction function. Barclays has reset its previous forecast, which anticipated a 25 basis point rate cut in March 2027, now expecting the Fed to maintain the current rate level throughout 2027. If macro volatility remains high, the risk premium on asset prices is expected to trend upwards.
