Citi delays rate-cut forecast as nine Fed officials see 2026 hike

The Fed's hawkish pivot is forcing even Wall Street's most dovish forecasters to rethink their rate-cut calls.

Citigroup, the last major Wall Street holdout for early Federal Reserve rate cuts, pushed back its expected timeline after nine of 19 central bank officials projected a rate increase in 2026.

"The inflation impulse from the Iran war has shifted the debate from when to cut to whether to hike," said Andrew Hollenhorst, chief U.S. economist at Citigroup, in a note to clients Thursday.

The Fed's June 17 dot plot showed the median rate projection for end-2026 rose to 3.8 percent, a quarter point above the current 3.50 percent to 3.75 percent target range. None of the 19 policymakers had seen a rate hike warranted as recently as March. Six of the nine who now expect a hike believe more than one quarter-point increase will be needed, according to the projections published alongside the Fed's unanimous 12-0 decision to hold rates steady.

The shift matters because Citi had been the most dovish among major brokerages, consistently forecasting cuts beginning in the third quarter. If even Citi is backing away, the consensus for higher-for-longer rates solidifies — a scenario that would strengthen the dollar, pressure growth stocks and raise borrowing costs for households and businesses.

The Inflation Calculus

The hawkish turn reflects a sharp deterioration in the inflation outlook since the start of the Iran war. The Fed's preferred inflation gauge, the personal consumption expenditures price index, is now seen at 3.6 percent by year-end, up from the 2.7 percent forecast in March. Core PCE, which strips out volatile food and energy prices, was revised to 3.3 percent from 2.7 percent.

Energy prices drove roughly 60 percent of the May CPI increase, according to the Seeking Alpha analysis. But the supply shock that pushed Brent crude above $90 a barrel during the three-month conflict may already be reversing. Global oil prices dropped sharply after the U.S. and Iran announced a memorandum of understanding last week to end hostilities and restore flows through the Strait of Hormuz. Brent has since fallen back into the $70s, though the pace of recovery in shipping and exports remains uncertain given damage to energy facilities.

New Fed Chairman Kevin Warsh, who took over the central bank's helm just ahead of this meeting, abstained from submitting his own rate projection — a break with tradition that he defended in his debut press conference. "I did not submit a dot for me. It's not helpful in the conduct of policy," Warsh said. He signaled plans to review the Fed's communications practices by year-end, including the dot plot, press conferences and meeting schedules.

What Markets Are Pricing

Overnight-indexed swap markets now price a rate increase by September, according to Reuters data, a dramatic reversal from just three months ago when traders were betting on two to three quarter-point cuts by year-end. The 10-year Treasury yield barely moved after the Fed decision, suggesting bond investors share the view that the oil-driven inflation spike may prove temporary.

The unemployment rate held at 4.3 percent in May, matching the Fed's year-end projection and below the 4.4 percent policymakers had forecast in March. GDP growth is now seen at 2.2 percent for 2026, down from the 2.4 percent estimate three months ago.

The next FOMC meeting is scheduled for July 28-29. Between now and then, two more CPI reports and one PCE release will give policymakers — and forecasters like Citi — a clearer read on whether the inflation storm has passed or is here to stay.

This article is for informational purposes only and does not constitute investment advice.