The Fed May Take a Break Until 2027 Before Moving to Rate Cuts — Citi

The next move by the U.S. Federal Reserve (Fed) could be a rate cut, even though markets are expecting another rate hike. Scott Horner, head of U.S. equity strategy at Citi Research, made this statement during an appearance on CNBC.

In his assessment, the regulator will maintain a pause until mid-2027, after which it will begin to lower borrowing costs. “We’ve already seen the September rate hike, and they’ll likely take a break until the middle of next year,” Kronert noted.

The analyst believes that following the September decision, inflation will begin to decline, while the labor market will face more significant pressure. At the same time, he acknowledged that the recent rate hike alone “won’t do much” to establish a firm perception that the Fed’s goal is to slow inflation. In his view, one or two additional hikes would help reassure traders of the central bank’s stability: “I could accept another Fed rate hike and probably frame it in a positive light.”

In September, the Fed raised rates by 25 basis points—its first increase in borrowing costs in three years—and hinted at the possibility of another rate hike. This shift in sentiment is clearly reflected in data from the CME FedWatch tool. While futures still put the probability of another rate hike at the December meeting at approximately 81.7%, the market is firmly pricing in a pause for the upcoming meeting on October 28: the probability of the rate remaining unchanged is 74%, while the chances of a rate hike stand at just 26%.

Against this backdrop, the yield on two-year U.S. Treasury bonds fell by nearly 10 basis points to 4.793%. The decline in yields is “most likely just investors pricing in a lower probability that the Fed will need to raise rates this month,” Ross Mayfield, an investment strategist at Baird Private Wealth Management, told CNBC.

On Wednesday, September 30, Goldman Sachs pushed back its expected timing for the next rate hike from October to December. The reason for the revision was the Federal Reserve’s preferred measure of inflation—the Personal Consumption Expenditures (PCE) price index—which came in below forecasts in August (3.4% year-over-year versus an expected 3.7%).

Ross Mayfield also confirms this trend: “Weaker PCE figures, isolated ‘dovish’ comments from Fed officials, and, possibly, positioning ahead of the labor market data [are contributing factors, and]... weaker employment data will all but seal the Fed’s decision to keep rates unchanged in October.”

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