- Citigroup has postponed its forecast for the Federal Reserve's interest rate cut, moving the first rate cut from September to October this year, and expects another cut in December, mainly due to policymakers' overall shift towards a hawkish stance.
- The new Federal Reserve Chairman, Kevin Warsh, officially announced the cancellation of forward guidance, emphasizing that future decisions will be highly dependent on current economic data and event-driven factors, leading to a significant increase in market uncertainty regarding the Fed's policy reaction function.
- The CME's FedWatch tool shows that traders have priced the probability of a rate hike in September at 50%, with institutions like Nomura Securities, Bank of America, and Deutsche Bank warning of potential risks of continued policy tightening.
Citigroup Revises Monetary Policy Path, Delays Rate Cut Timing
In its latest report, Citigroup adjusted its forecast for the Federal Reserve's (Fed) monetary policy path. Previously holding a relatively moderate stance among major Wall Street firms, Citigroup now expects the Fed to lower the benchmark interest rate by 25 basis points in October and December 2026, with a subsequent rate cut in January 2027. This adjustment overturns its previous judgment of consecutive rate cuts in September, October, and December. The core reason for this revision is the significant rise in hawkish sentiment within the Fed's decision-making body. At the monetary policy meeting held on Wednesday, the Fed maintained the benchmark interest rate but the dot plot showed that nearly half of the policymakers still see the possibility of a rate hike this year, with persistent inflation being their main concern.
Warsh Reshapes Communication Mechanism, Clarifies Cancellation of Forward Guidance
In his first press conference after taking office, the new Federal Reserve Chairman, Kevin Warsh, announced major reforms in policy communication, clearly stating the cancellation of the long-standing forward guidance. Warsh pointed out that in the current macroeconomic situation, providing clear future action guidance is inappropriate, and the Fed will not be able to provide a forward framework for specific actions in subsequent meetings. Deutsche Bank analysts noted that without over-reliance on forward guidance, the Fed may tighten monetary policy at a more flexible pace when inflation data exceeds expectations, making any future policy meeting potentially subject to immediate rate hikes. Investors' decision-making patterns will have to undergo a fundamental shift.
Wall Street Raises Tightening Risks and Spot Rate Pricing
With the blurring of policy guidance, financial markets have quickly begun to reprice the interest rate path. According to the CME Group's FedWatch tool, market traders have currently priced the probability of a rate hike at the September policy meeting at 50%, a significant increase from 27% the previous day. Institutions like Nomura Securities and Bank of America, which originally did not expect a rate cut this year, stated that due to the strong signals from the dot plot, the overall risk of resuming rate hikes this year is continuously accumulating. In this environment, any minor economic disturbance is easily amplified by the market, leading to larger-scale asset price fluctuations.
Data-Dependent Communication Model Increases Market Uncertainty
Several investment banks emphasize that the future market guidance mechanism will undergo a fundamental transformation. JPMorgan pointed out that in the absence of forward guidance, investors' decisions will heavily rely on upcoming core economic data and public statements by Fed officials, with the importance of policy officials' positions significantly increasing. Barclays' analysis team stated that this shift towards a data and event-driven communication model has greatly increased the market's uncertainty premium. Based on this, Barclays has revised its Fed policy forecast from a 25 basis point rate cut in March 2027 to maintaining the benchmark interest rate level unchanged throughout 2027. If core inflation indicators continue to rebound in the second half of the year, the global cross-asset pricing benchmark may face a new round of revaluation.
