- Citigroup (C:US) has officially revised its expectations for the Federal Reserve's (Fed) monetary policy cycle, delaying the first rate cut from the originally estimated September 2026 to October, primarily due to policymakers signaling unexpectedly hawkish stances.
- At the first policy meeting chaired by the new Federal Reserve Chairman Kevin Warsh, the Federal Open Market Committee chose to keep the benchmark rate unchanged, but there was a significant shift to the right in the committee's views, with nearly half of the policymakers now predicting a possible rate hike within the year.
- With the Fed announcing the abolition of its long-standing forward guidance, the financial market's pricing logic for future interest rate paths is undergoing reconstruction, with public statements from several Fed policymakers and current macroeconomic indicators becoming the core basis for market assessments of policy direction.
Citigroup Revises Monetary Policy Path Forecast
Citigroup, which has long maintained a dovish policy stance among major Wall Street buy-side and sell-side institutions, has officially adjusted its interest rate path after evaluating the latest Fed meeting minutes and official statements. According to Citigroup's latest research report, the bank now expects the Fed to lower the benchmark rate by 25 basis points in October and December 2026, and implement a third similar rate cut in January 2027. In contrast, the institution's previous baseline forecast was for three consecutive rate cuts in September, October, and December. This marginal change reflects a collective reassessment by major international financial institutions of the pace of liquidity shifts amid rising global inflation concerns.
Hawkish Decisions Reshape Short-Term Rate Futures Pricing
Under the leadership of the new Chairman Warsh, the Fed chose to hold steady at Wednesday's meeting, but the committee's internal concerns about inflation persistence far exceeded market expectations. The dot plot and related policy statements indicate that nearly half of the decision-makers are inclined to further raise the benchmark rate within 2026. Driven by this hawkish signal, the short-term rate futures market experienced significant volatility. According to real-time data from the CME Group's (CME:US) Fedwatch tool, traders have priced the probability of a 25 basis point rate hike at the September meeting at 50%, up from just 27% the previous trading day. This significant pricing shift indicates that the market is rebalancing assets for the tail risk of the Fed potentially restarting the rate hike cycle.
Abolition of Forward Guidance Amplifies Macroeconomic Data Effects
Warsh initiated a deep policy review of the Fed's communication mechanism upon taking office. One of his core measures was to clearly announce the cancellation of forward guidance. In his first press conference, Warsh stated that in the current complex economic situation, providing the market with long-term policy path indications is inappropriate, and he himself cannot offer forward guidance on upcoming actions. In response to this major policy shift, JPMorgan's (JPM:US) analysis team pointed out that the absence of forward guidance will force global investors to focus intensely on subsequent releases of key high-frequency data such as non-farm employment and core inflation, with any public speeches by decision-makers having a higher market volatility multiplier effect.
Investment Bank Consensus Divergence Intensifies Policy Shift Game
With the withdrawal of forward guidance, the consensus among major Wall Street financial institutions on the Fed's future policy path is rapidly diverging. Barclays (BARC:LN) commented that the Fed's shift from forward guidance to a data and event-driven communication model significantly increases the difficulty and uncertainty of market calculations of the central bank's policy reaction function. Barclays has revised its previous forecast of a 25 basis point rate cut in March 2027, now expecting the Fed to maintain the current high rate level throughout 2027. Meanwhile, institutions such as Nomura Securities (NMR:US) and Bank of America (BAC:US) further warn of risks, suggesting that given the current hawkish inclination within the decision-making body, if core inflation indicators or labor market data rebound unexpectedly, the likelihood of the Fed taking rate hike actions within the year will rise significantly, potentially leading to sustained tightening of global financial conditions over the coming quarters.
