Citi Remains Lone Wall Street Bank Predicting 2026 Fed Rate Cuts

Citigroup remains the only major Wall Street institution maintaining a forecast for Federal Reserve interest rate cuts this year, even as a surge in May employment data has led competitors to abandon easing projections in favor of potential hikes [1, 3]. The divergence highlights a deepening rift between market participants, who have fully priced in a December rate increase, and the bank’s outlook for a cooling labor market [5, 7].

Market reaction to labor data

The shift in market sentiment followed the release of May nonfarm payroll data, which showed 172,000 new jobs added—a figure that exceeded all economist forecasts in a Bloomberg survey and marked the largest three-month increase in over two years [3, 5]. This data triggered a sharp sell-off in the bond market, pushing the 2-year Treasury yield up by 15 basis points in a single week [3]. The yield curve has flattened significantly, with the 30-year Treasury yield climbing back above the 5% threshold [3].

Interest rate swap markets now reflect a total reversal of previous easing expectations. Traders have fully priced in a 25-basis-point rate hike for December, with the probability of an October increase currently estimated at approximately 60% [1, 7]. This reaction reflects a broader concern among investors that the Federal Reserve may be "behind the curve" as inflation risks remain elevated alongside a resilient labor market [3].

The isolation of Citi’s forecast

While Citi maintains its prediction of three 25-basis-point cuts in September, October, and December, other major institutions have pivoted [3]. Goldman Sachs, for instance, has abandoned its 2026 rate-cut expectations, citing the combined impact of tariffs, elevated oil prices, and AI-driven demand as factors that will keep core PCE inflation above 3% [3]. JPMorgan has incorporated 2027 rate hikes into its baseline, while BNP Paribas has projected three consecutive hikes beginning in December 2026 [3, 5].

Andrew Hollenhorst, Citi’s chief U.S. economist, argues that the current strength in employment is transitory [7]. He expects the labor market to soften significantly over the next three months, which he believes will force the market to reprice the probability of cuts rather than hikes [3]. Citi’s persistence is notable given its track record; the firm correctly predicted three rate cuts last year when many competitors expected the Fed to remain on hold [3, 5].

What to watch

• June 16-17 FOMC Meeting: Monitor the official policy statement for shifts in the "hawkish" focus on inflation risks versus potential concerns regarding labor market cooling [3].
• Labor Market Softening: Watch for signs of a deceleration in payroll growth or unemployment trends over the next 90 days, which Citi identifies as the catalyst for a potential return to a dovish policy stance [7].
• Fed Chair Succession: Track the status of the Kevin Warsh nomination and the ongoing investigation into the Fed headquarters renovation, as these political and administrative variables continue to influence the central bank's independence and leadership stability [6].

The central question remains whether the Federal Reserve will lead market expectations or be forced to follow the aggressive tightening path currently dictated by bond traders. With Citi standing alone, the coming quarter will serve as a critical test of whether the current economic resilience is a durable trend or a temporary phase.