Citi revises Fed rate-cut expectations following hawkish policy signals

Citigroup has revised its expectations for US Federal Reserve interest rate cuts, pushing back its projected timeline by one month as policymakers adopt a more hawkish stance and inflation concerns persist.

The Wall Street firm now expects the Federal Reserve to cut interest rates in October and December 2026, followed by another reduction in January 2027.

The revised forecast replaces its earlier expectation for rate cuts in September, October, and December.

The change comes after the Federal Reserve left its benchmark interest rate unchanged on Wednesday.

The decision marked the beginning of a broad policy review under new Chair Kevin Warsh, who recently assumed leadership of the central bank.

Fed officials signal caution

According to Citigroup, recent signals from Federal Reserve officials indicate a greater degree of caution regarding future policy easing.

Nearly half of policymakers now expect interest rates to rise this year amid mounting concerns over inflation.

In a note, Citigroup said, "While Warsh did not mention it explicitly, he likely shares our view that many of these dots would have been lower had officials had more time to digest the rapid drop in oil prices over recent days."

The bank suggested that recent movements in energy markets may not yet be fully reflected in policymakers' projections.

However, it acknowledged that consensus within the Federal Reserve appears to be shifting more slowly toward rate cuts than previously anticipated.

Warsh, who was selected by US President Donald Trump with expectations that he would support lower interest rates, now faces the challenge of diminishing support among policymakers for immediate easing measures.

Market expectations have also evolved.

According to LSEG data, traders have fully priced in a 25-basis-point rate hike by October.

Oil prices and inflation remain key factors

Earlier in the year, the conflict involving Iran contributed to higher fuel prices and concerns about potential disruptions to global energy supplies

Those developments raised fears that inflation could move further above the Federal Reserve's 2% target.

Although oil prices have since declined sharply following an agreement between Iran and the United States to restore flows through the Strait of Hormuz, uncertainty about the arrangement's durability remains.

Citigroup analysts stated that weaker core Consumer Price Index readings and softer labour market conditions are still expected during the June-to-August period.

However, they cautioned that policymakers may require additional evidence before broadly supporting interest rate reductions.

Applied Materials jumps after Citi upgrade

Meanwhile, shares of Applied Materials rallied sharply after Citigroup raised its price target on the semiconductor equipment manufacturer, citing accelerating investment in artificial intelligence and increasing demand for memory-related chipmaking equipment.

Applied Materials shares surged 9.7% during trading and reached a new 52-week high of $623.35.

Citigroup increased its price target on the company to $710 from $550 while maintaining its Buy rating.

The positive outlook extended across the semiconductor equipment sector.

Citigroup shares near multi-year highs

Citigroup's own shares have continued to trade near multi-year highs, hovering in the $143-$146 range.

The stock remains close to its highest levels in approximately 17 years.

The broader outlook for Citigroup remains positive, with analysts maintaining a bullish to moderately optimistic view.