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Citi: Fed to deliver a "dovish hike"
Economy
Citi Research expects the Fed to raise interest rates by 25 basis points to a range of 3.75%–4% at the upcoming Federal Open Market Committee (FOMC) meeting.
Recent inflation data provided officials with only minimal support for policy tightening, while details within the report point to a gradual slowdown in inflation.
According to Citi, this leaves open the possibility that the Fed might keep rates unchanged pending new data, or that some officials could vote against a hike.
The meeting will also feature updated economic projections. Citi expects the median forecast for core PCE inflation for 2026 to be revised downward—from the 3.3% projected in June to a level close to 3% (on a Q4-over-Q4 basis).
Citi noted that there could be significant divergence in forecasts among officials. GDP expectations are likely to remain largely unchanged, while unemployment rate forecasts should edge lower.
Factoring in the September rate hike, Citi expects the median "dot" to signal one additional hike this year—making it two in total—though many officials might not pencil in further increases beyond September.
Core CPI came in slightly above expectations at 0.29% month-over-month, implying a similar growth pace for core PCE.
Citi stated that this figure, combined with rising oil prices, likely offers only minimal justification for a rate hike, describing the decision as a close call given that other details in the report point to a continued deceleration in inflation. Fed Governor Kevin Warsh used his speech at Jackson Hole to emphasize that inflation is persistently above target and that "much work remains" if it does not begin to decline toward the target quickly enough. According to Citi, the core PCE—running at an annualized monthly rate of 3.5%—fails to meet this criterion and should prompt Warsh to support a rate hike.
Fed Governor Christopher Waller has been characterized as more "dovish": while encouraged by two months of lower inflation, he indicated that "hot" data would lead him back to supporting a rate hike in September.
Citi believes that Warsh and Waller will likely be joined by the three regional Fed presidents who voted for a hike in July, as well as a number of governors, resulting in a decision with minimal dissent. Citi noted that Warsh might soften the perception of the move by describing the hike at a press conference as a "calibration" rather than the start of a tightening cycle.
Citi expects a rebound in retail sales for August, with both the headline figure and "control group" sales projected to rise by 0.7% month-over-month. Industrial production is forecast to show another solid gain, while single-family housing construction should recover following weak July data. Initial jobless claims are expected to remain at historically low levels.