Citigroup Sees Fed Rate-Hike Cycle Ending Early If Core PCE Holds at 2%

Citigroup sees a possible early end to the Federal Reserve’s rate-hike cycle if core personal consumption expenditures inflation holds near a 2% annualized pace for several months, a shift that could reduce the case for another increase.

The bank’s view focuses on the short-term trend in core PCE rather than the still-high year-over-year reading. Core PCE rose 0.2% month over month in August, while July’s increase was revised to 0.1%. The measure was up 3.0% from a year earlier.

A sustained annualized pace near 2% would indicate that inflation is moving toward the Fed’s target at a sufficient rate. That could weaken the preventive rationale for the September rate increase and reduce the case for another hike.

The September meeting minutes showed that at least some Federal Reserve officials did not view the economy as clearly overheated. They supported the increase as a risk-management measure amid concerns about upside inflation risks.

The minutes did not indicate an urgent need for a consecutive increase in October.

Citigroup’s base case calls for core inflation to remain low over the next four months, with downside risk to September’s reading. The bank also expects higher energy costs to have limited pass-through into core prices because companies have not broadly passed those costs into core prices.

The potential policy change would mean the rate-hike cycle ends earlier than projected by the Fed’s dot plot and market expectations. It would not represent an immediate shift toward rate cuts.