Did the market misjudge? Citigroup: "Risk management" is not a hawkish signal, the Federal Reserve will have two more rate cuts this year!

The market may have misread the latest signals from the Federal Reserve.

According to the news from Chasing Wind Trading Desk, Citigroup analysts Andrew Hollenhorst, Veronica Clark, and others pointed out in their latest research report that although the market interpreted Federal Reserve Chairman Jerome Powell's "risk management" wording as a hawkish stance, a series of details indicate that the Federal Reserve's policy stance is actually leaning towards dovish, and it is expected to implement two more rate cuts within the year.

After the Federal Reserve announced a 25 basis point rate cut on Wednesday, Powell attributed this move to "risk management" during the press conference. Citigroup believes that Powell's statement that "the effectiveness of this rate cut depends on the market's expectations for further rate cuts" is essentially guiding the market to prepare for subsequent actions. Moreover, the FOMC's meeting statement, Summary of Economic Projections (SEP), and voting details all contain clear dovish tendencies.

Taking these signals into account, Citigroup reaffirmed its forecast for the Federal Reserve's future interest rate path, believing that the easing cycle has just begun. They expect that after this rate cut, the Federal Reserve will cut rates by another 25 basis points in each of the remaining two meetings this year (October and December) to address the growing downside risks to employment.

"Risk management" wording triggers hawkish misinterpretation

The market's hawkish interpretation of the Federal Reserve mainly stems from Powell's response to a reporter's question.

When asked whether the rate cut was due to "risk management" or because the economy had entered a recession, Powell chose the former. As a result, the market interpreted this rate cut as a preventive measure, thereby weakening expectations for continued easing in the future.

However, Citigroup believes that this interpretation overlooks the complete context of Powell's remarks. Powell later clarified that the impact of a single 25 basis point rate cut is limited, and its effectiveness largely comes from the market's digestion and pricing of further rate cuts. Citigroup believes that this suggests that the baseline scenario for Federal Reserve officials is to follow the guidance of the market and the dot plot, completing a total of 75 basis points of rate cuts within the year.

Additionally, Powell no longer emphasized that interest rates need to remain at "clearly restrictive" levels, but instead stated that the policy rate should be on a path towards "neutral," which itself is an important sign of the shift in policy stance from tight to loose.

Meeting statement and dot plot imply dovish signals

Citigroup believes that the real policy signals are hidden in the details of the meeting statement and the dot plot. The most significant change is that the FOMC explicitly added the statement "the downside risks to employment have increased" in the post-meeting statement. This directly confirms that decision-makers' concerns about the labor market outlook are intensifying.

At the same time, the median of the latest dot plot has also clearly shifted downward. According to the report, among the 19 participants, 10 have lowered their predicted points, pushing the median interest rate forecast for 2025 down to 3.6%, indicating that there will be three 25 basis point rate cuts within the year.

The report emphasizes that the background of this dovish shift is that decision-makers slightly raised their forecast for core PCE inflation in 2026 while lowering the unemployment rate forecast. The decision to lower the interest rate path despite no significant deterioration in economic forecasts further highlights its dovish tendency. Another detail worth noting is that Federal Reserve Governor Stephen Miran voted against at this meeting, favoring a one-time rate cut of 50 basis points. This "dovish dissent" further supports the notion of a stronger easing tendency within the committee.

Employment Risks Outweigh Inflation Concerns, Rate Cut Cycle "Has Just Begun"

Citigroup analysis states that the Federal Reserve's policy balance is shifting from inflation risks to employment risks.

Although the statement still mentions that inflation "has rebounded and remains somewhat elevated," Powell attributed it to commodity prices and pointed out that service sector inflation is still slowing. He also noted that even though tariffs have created some price pressures, their transmission effects are slower and smaller than previously expected earlier this year.

In contrast, decision-makers have significantly increased their focus on the labor market. Powell explicitly stated that the slowdown in hiring is not only due to a weak labor supply caused by reduced immigration but also due to a slowdown in demand, with the rising unemployment rate serving as evidence.

The report emphasizes that the cooling of the job market will be a key driving factor for the Federal Reserve's subsequent actions.

Based on the above analysis, Citigroup is more confident in its original forecast. A report written by Andrew Hollenhorst, Veronica Clark, and Gisela Young reiterates that the Federal Reserve will cut rates consecutively in the next four policy meetings.

Citigroup expects that as data in the coming months further confirms the cooling of labor demand and the slowdown of core inflation, the Federal Reserve will have a clear path to lower the policy rate to a range of 3.00-3.25%.

The report concludes that including the rate cut from this meeting, the total rate cuts in this round of easing by the Federal Reserve will amount to 125 basis points, and if the economic slowdown exceeds expectations, the risk to the rate path is skewed towards a larger downward adjustment