Citi keeps September rate cut likely after FOMC Minutes analysis

Investing.com - Citi maintains its view that a September rate cut remains likely after analyzing the recently released Federal Open Market Committee (FOMC) Minutes from the June meeting. The treasury market, tracked by the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), currently trading at $86.93 and showing a modest 0.64% YTD return according to InvestingPro, reflects these expectations.

The FOMC Minutes revealed a mixed stance among committee members, with a small number of participants potentially supporting a rate cut as early as July, while some leaned toward no cuts this year. Most members, however, still believe resuming cuts later in 2023 will be appropriate. This uncertainty is reflected in TLT’s relatively low price volatility, with a beta of 0.49.

Citi noted the current 4.1% unemployment rate makes a July cut "very unlikely" and highlighted a somewhat hawkish tone in the Minutes, with more officials expressing concern about persistent inflation risks from tariffs compared to May, despite softer-than-expected inflation data.

The analysis also pointed out that some officials appear increasingly worried about a weakening labor market, while others may be encouraged by recently falling inflation expectations.

Citi projects that by September, inflation concerns will have further subsided while labor market worries will have increased, leading the Federal Reserve to cut rates in September and at each subsequent meeting until reaching 3-3.25%.

In other recent news, the Federal Open Market Committee (FOMC) released minutes from their May meeting, indicating a cautious approach amidst rising tariffs and economic uncertainty. The FOMC highlighted concerns over inflation and labor market risks, but maintained a wait-and-see stance on policy changes. Meanwhile, Moody’s downgraded the United States’ sovereign credit rating, following similar actions by S&P and Fitch in previous years. JPMorgan analysts expect the downgrade’s impact on financial markets to be modest, given that bond index providers had already adjusted their classifications. Citi’s rates strategist also suggested that the downgrade is unlikely to significantly affect foreign demand for U.S. Treasuries, despite a challenging fiscal landscape. Furthermore, Federal Reserve Vice Chair Philip Jefferson discussed central banks’ role in providing liquidity at the 2025 Financial Markets Conference, emphasizing the importance of liquidity facilities. Lastly, Fed Chair Jerome Powell indicated that officials are reconsidering their monetary policy approach due to recent inflation experiences and potential supply shocks. Powell noted that the Fed is reviewing its strategy and may adjust its stance on employment and inflation targets.

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