The strategic perspective from Citigroup Inc. highlights a cautious stance for bond traders amidst the Federal Reserve's anticipated easing cycle. The bank's economists expect the Fed to initiate rate cuts as soon as June, but Citigroup warns against complacency, drawing parallels with the brief easing cycle of 1998. During that year, the Fed's quick succession of rate cuts to mitigate the effects of the Russian debt default was soon followed by rate hikes to address inflationary pressures. Traders currently forecast up to five quarter-point rate cuts for 2024, slightly above the Fed's own predictions.
However, Citigroup advises that the market should hedge against the risk of an uptick in rates if inflation doesn't consistently trend towards the Fed's 2% target. The possibility of a sticky inflation rate may lead to a reconsideration of the Fed's neutral rate and potentially cause a steepening of the Treasury yield curve. Inflation data for January, expected to drop below 3%, will be a critical indicator to watch.
Market Overview:
-Citigroup sees bond market pricing overlooking potential for future Fed rate hikes.
-Rapid cuts followed by tightening similar to 1998 scenario a possibility.
-Sticky inflation could trigger steeper yield curve and policy adjustments.
Key Points:
-Market currently expecting 4-5 quarter-point Fed cuts in 2024.
-Citi urges pricing in risk of subsequent rate increases akin to 1998.
-January's inflation data release seen as crucial indicator for Fed policy.
Looking Ahead:
-Continued monitoring of inflation for signs of sustained downward trend.
-Potential for market adjustments if concerns about future rate hikes arise.
-Fed's February meeting and Powell's comments closely watched for policy insights.
The Fed has been on a rate-raising spree, with the benchmark interest rate lifted by over five percentage points from March 2022 through July of the following year. Since then, rates have remained steady, with indications from Fed Chair Jerome Powell that a cut in the following month is improbable without more evidence of inflation aligning with the central bank's goal.
