The Federal Reserve's April FOMC minutes delivered the strongest hawkish signal in recent years, with officials seriously weighing the possibility of rate hikes for the first time. Markets immediately scaled back their rate-cut pricing significantly. However, Citi Research countered this consensus view, arguing that market pricing has already overshot and that expectations for rate cuts have been severely underestimated. It is more likely that Waller will not push for a rate cut at the June meeting but will continue to support an eventual reduction in rates, anticipating that the window for a September rate cut will still open—contingent on when the labor market shows signs of weakening.
The minutes from the Federal Reserve's May FOMC meeting delivered the most hawkish signal in recent years, but Citi Research believes that markets have overreacted in repricing the Fed’s policy trajectory—underestimating the likelihood of rate cuts and exaggerating the perceived hawkish pivot of Kevin Warsh, who is set to assume the chairmanship.
According to the FOMC minutes released on April 30 and made public on May 20 (Eastern Time), "most" participants judged that if inflation remained persistently above 2%, further policy tightening might become appropriate; "many" officials favored removing language from the post-meeting statement that suggested a bias toward easing. This marked the first time in nearly two years that Fed officials seriously weighed the possibility of raising rates during a meeting, signaling a substantive shift in the internal debate. Following the release of the minutes, yields on two-year U.S. Treasuries rose, market pricing for rate cuts was further reduced, and investors began assigning probability to a rate hike this year.
According to Zuishen Trading Desk, Citi Research explicitly stated in its report issued on the day of the minutes’ release that market pricing was mistaken. Economists including Andrew Hollenhorst at Citi noted that the rise in two-year Treasury yields and the market’s effective elimination of rate-cut expectations both contradicted Citi’s outlook for the Fed’s policy path. Citi maintains that the probability of rate cuts exceeds that of hikes in both 2024 and 2025, and expects the Fed to resume cutting rates in September.
Minutes Signal Strongest Hawkish Stance in Recent Years
The internal divergence reflected in the April FOMC minutes was the most pronounced since 1992. Four of the twelve voting members dissented on the post-meeting statement: besides Governor Michelle Bowman, who advocated for an immediate 25-basis-point rate cut, the other three dissenters opposed the retention of language suggesting a dovish tilt in the statement.
The minutes indicated that participants broadly agreed that, given persistently elevated inflation data and heightened uncertainty regarding the duration and economic impact of the Middle East conflict, the period of maintaining the current policy stance could extend beyond prior expectations. "Most" participants emphasized that if inflation remained persistently above 2%, some degree of policy tightening might become appropriate; "many" officials expressed a preference for removing language in the post-meeting statement that implied a bias toward easing.
Nick Timiraos, often dubbed the "Fed whisperer," commented that under the dual influence of the Middle East conflict and the AI boom, the Fed—on the cusp of a leadership transition—has reshaped its interest rate outlook. Officials have effectively set aside the central question that dominated internal debates over the past two years—whether to cut rates—and are now more seriously weighing the opposite possibility: whether to raise rates.
Compared with the March minutes, the April minutes exhibited a markedly more hawkish tone. In March, only "some" officials believed the Fed had reason to issue balanced forward guidance; by April, this group had expanded to "many" officials who favored adopting more neutral language in the policy statement.
Citi: Minutes Do Not Reflect Warsh’s Position
Citi Research emphasized that these minutes reflect discussions held during former Chair Powell’s tenure and do not represent the policy inclinations of incoming Chair Warsh.
Citi noted that a prevailing market view over the past week has been that Waller would pivot and abandon his prior support for rate cuts. Citi explicitly refuted this, arguing that it is more likely Waller will not advocate for a rate cut at the June meeting but will continue to support an eventual reduction in the policy rate. Waller will chair his first press conference following the June meeting, where he will need to directly address the hawkish tilt reflected in the minutes.
Citi expects the Federal Reserve to resume rate cuts in September, as monthly core inflation cools and the unemployment rate rises. Under Citi’s baseline scenario, the probability of rate cuts exceeds that of hikes in both this year and next.
Rate Cut Catalyst: Awaiting Labor Market Weakening
Citi also stated in its report that current market pricing underestimates the likelihood of Fed rate cuts, but there is a lack of near-term catalysts that would trigger a significant repricing—unless the situation regarding the Strait of Hormuz blockade is resolved.
From a fundamentals perspective, Citi believes the U.S. economy is currently operating at an underlying growth rate of approximately 2%. Consumer spending has remained resilient despite multiple shocks, including higher energy prices, and AI-related capital expenditures continue to provide growth momentum. Neither of these factors is likely to reverse sharply in the near term, making it unlikely that economic data alone will prompt a substantial repricing of policy expectations.
On inflation, Citi argues that core PCE somewhat exaggerates the extent to which monetary policy has deviated from the Fed’s target. Core PCE may remain above 3% for the rest of this year, partly because the PCE index assigns relatively high weights to price components driven by AI-related demand. The trimmed-mean PCE, which excludes extreme values, currently stands at 2.4%—not far from the Fed’s 2% target—and Citi expects annualized core PCE readings to move closer to the 2% target going forward.
Citi judges that a clear signal of labor market deterioration would be needed for markets to reduce the implied probability of rate hikes and increase pricing for cuts. Citi anticipates that seasonal factors will produce softer employment data in the coming months; a rising unemployment rate, coupled with increased initial jobless claims and less concerning inflation readings, would pave the way for the Fed to restart rate cuts in September. However, markets may need to wait until after the release of both the May and June employment reports before materially adjusting their implied probabilities for rate hikes and cuts.
Editor/Deng