Citigroup is betting the Federal Reserve will keep interest rates unchanged at its next meeting, even as financial markets assign a one-in-three probability of a hike. The bank's forecast, shared with clients this week, pushes back against the more hawkish pricing seen in futures and options markets.
What the odds mean
The 33% probability of a rate increase comes from the CME FedWatch Tool, which tracks trading in fed funds futures. That figure has climbed in recent weeks after stronger-than-expected economic data and cautious comments from some Fed officials. But Citigroup's economists argue the central bank will hold its benchmark rate steady, citing a still-uncertain inflation outlook and the lagged effects of previous tightening.
Why Citi disagrees with the market
In a note to clients, the bank's research team said the Fed is likely to look past short-term data noise and keep rates where they are. They pointed to the central bank's own projections, which show only one quarter-point cut this year, and noted that Chair Jerome Powell has repeatedly stressed a data-dependent approach. A rate hike, they argued, would require a clear and sustained acceleration in inflation — something they don't see happening.
The market's pricing, meanwhile, reflects a more reactive stance. Some traders see the risk that the Fed could be forced to act if inflation proves stickier than expected. But Citigroup believes the bar for a hike is high and that the Fed will prefer to wait for more evidence before making any move.
What's at stake
The Fed's next decision, scheduled for mid-June, comes at a delicate moment. The economy has shown surprising resilience, but inflation remains above the central bank's 2% target. A hold would signal patience; a hike would rattle markets and likely push borrowing costs higher for consumers and businesses. Citigroup's view aligns with the consensus among most major Wall Street banks, though the 33% probability shows that a minority of traders are bracing for a surprise.
The bank's forecast doesn't rule out a cut later this year. It expects the Fed to begin easing in the fall if inflation continues to moderate. But for now, the message is clear: don't expect a move in June.
