Terminal Federal Funds Rate to hit 3.25-3.50% in 2025: Citi

Citi analysts anticipate significant changes in the Federal Reserve's monetary policy, projecting that the terminal federal funds rate will decline to 3.25-3.50% by 2025.

In their recent note, the bank's analysts detailed expectations for the Federal Open Market Committee (FOMC) to signal the commencement of rate cuts, starting with a 25 basis point reduction in September.

"Fed officials are widely expected to hold rates steady on Wednesday at 2 PM but should send a clear signal that the first 25bp rate cut will be delivered at the next meeting in September," Citi analysts stated.

They explain that this potential rate cut is made possible by slowing inflation, which grants the Fed flexibility to reduce rates without immediate inflationary pressures.

The Citi note highlights that the rising unemployment rate could further compel the Fed to act swiftly in cutting rates. "The rising unemployment rate will likely increase the sense of urgency to cut in the coming months," the analysts noted.

They predict a 75 basis point reduction this year, followed by continuous 25 basis point cuts at each subsequent meeting until the terminal rate target of 3.25-3.50% is reached in 2025.

In their analysis, Citi clarifies that recent data trends support the Fed's inclination towards rate cuts. Core PCE inflation figures have shown a deceleration, with the annualized rate falling to 2.9% in Q2. This slowdown, coupled with reduced shelter inflation, "should finally give Fed officials confidence to begin guiding toward rate cuts."

The path to achieving the terminal rate involves navigating various economic signals and policy debates among Fed officials. However, as Citi analysts conclude, "The path of least resistance is for Fed officials to use the July meeting to build consensus and signal an upcoming cut."

In summary, Citi's forecast of a terminal federal funds rate of 3.25-3.50% by 2025 hinges on the Fed's strategic response to inflation and unemployment trends, with initial rate cuts expected as soon as September.