News & analysis
Citi's Chronert Sees a Fed Cut While Futures Price a December Hike
The strategist expects the central bank to pause after September's increase before lowering borrowing costs, a path that sits against roughly 85% odds of another hike in fed funds futures.
Key points
- Citi Research's Scott Chronert expects the Fed's next move could be a cut, with Citi economists describing the central bank as in "pause mode 'til middle of next year."
- Fed funds futures imply roughly 85% odds of a December rate increase, according to CME's FedWatch tool, after the Fed's September hike of 25 basis points — its first in three years.
- Chronert said the September increase alone wouldn't do much to establish an anti-inflation narrative, and that one or two more hikes could reassure traders the central bank is stable.
Scott Chronert, head of U.S. equity strategy at Citi Research, said the Federal Reserve's next move could be a rate cut rather than the additional increase markets widely expect, with Citi economists seeing the central bank settling into a holding pattern after its September hike before borrowing costs come down.
The gap between Citi's view and market pricing is wide. The Fed raised rates by 25 basis points in September, its first increase to borrowing costs in three years, and signaled that another hike could be in the cards. Fed funds futures instead suggest a roughly 85% likelihood that the Fed will increase rates again at its December meeting, according to CME's FedWatch tool.
Chronert's case for a pause rests on the direction of inflation and the labor market after the September move. He said inflation could begin to pull back and the labor market could feel more intense pressure. Citi economists believe "we've got the September hike and they're probably in pause mode 'til middle of next year," Chronert said on CNBC's "Squawk on the Street," after which the Fed could lower borrowing costs.
He acknowledged that the September hike alone wouldn't "do much" to establish a narrative that the Fed is focused on bringing down inflation. Because of that, he said one or two additional increases could be useful for assuring traders that the central bank is stable. "I can take another Fed rate hike and probably spin that as a positive," Chronert said.
