Citigroup postpones Fed interest rate cut expectation after US employment data

Citigroup changed its forecast for the next interest rate cut by the US Federal Reserve (Fed) following the US employment data announced above expectations. Citi postponed the first of the interest rate cuts, which it had previously expected to start in 2026, to June 2027.

The institution had previously predicted that the Fed would cut interest rates in October, December 2026 and January 2027. In its new forecast, it expects three 25 basis point interest rate cuts in 2027, in June, September and December.

Citi's forecast change was influenced by the strong employment data announced in the USA. While non-agricultural employment increased by 162 thousand people in August, significantly exceeding expectations, the unemployment rate remained stable at 4.1 percent.

The institution evaluated that the latest data shows that the US labor market remains resilient and the need for easing monetary policy in the short term has decreased.

Citi economists Andrew Hollenhorst and Veronica Clark, who have long predicted that the Fed would follow a more dovish policy, stated that recent developments in the labor market may cause Fed officials to evaluate employment conditions as generally stable. According to economists, in this case, the Fed's focus may shift again to the inflation outlook.

In their evaluation, Citi economists pointed out that the unemployment rate remained unchanged and labor force participation recovered significantly.

INTEREST RATE REDUCTION EXPECTATIONS HAVE CHANGED IN THE MARKETS

Strong employment data also affected the markets' interest rate expectations regarding the Fed. In Fed funds futures, the probability of the Fed raising interest rates at its monetary policy meeting on September 15-16 increased from 52 percent before the employment data was announced to 61 percent.

Thus, strong labor market data caused the expectations that the Fed would ease interest policy in the near term to weaken.