© Reuters.
Citigroup economists believe that Jerome Powell faces a “major” decision at Wednesday’s FOMC meeting: whether to accept the loosening of financial conditions or resist it.
The economists suggest that March rate cuts seem premature as inflation remains above target, and economic activity has been holding up, including in the recent jobs report.
However, Citi observes signs that the Fed might be dovishly preparing to “pivot” towards cuts, even though inflation is not projected to reach the target.
Powell’s positive outlook is expected to continue this week despite a 0.30% month-over-month increase in November core CPI, which is a projection by Citi, which is stronger than desired but deemed acceptable given previous weaker readings.
“We think the unifying theme of Waller putting March cuts on the table and Powell pushing back on the timing but not the idea is a growing feeling amongst Fed officials that properly timed cuts can preserve a nascent soft landing by cushioning activity to avoid a recession,” analysts said in a note.
“That means Powell may have little willingness to sharply tighten financial conditions at this meeting.”
However, Citi economists take a less optimistic view.
“Core inflation is likely to be stuck around 3% and we have seen enough early signs to think the lagged effects of higher policy rates will lead to a self-reinforcing cycle of job loss and slowing activity,” analysts concluded.
