January's unexpectedly high core inflation altered market expectations, shifting from anticipating policy rate reductions as early as March to doubting any cuts will happen this year.
But despite this notable shift in market sentiment, Federal Reserve Chair Powell's remarks indicate that the Fed's stance has remained largely unchanged.
Above all, the central bank’s chief continues to stress the anticipated deceleration in core PCE inflation year-on-year, with forecasts suggesting a decline to around 2.5% by May, positioning the Fed for a potential rate cut in June, Citi economists said in a note Thursday.
While Powell maintained consistency with the Fed's previous outlook, Minneapolis Fed President Kashkari presented a significant revision in his outlook.
He raised concerns over whether the December Economic Projections, which anticipated 75 basis points in cuts, remain valid in light of recent robust inflation and employment figures.
Citi, however, does not believe Kashkari’s views will affect the Fed’s path.
“For now, we think Kashkari is a hawkish outlier and not representative of the committee’s views. So long as monthly core PCE inflation comes in 0.2-0.3%MoM, we see the Fed on track to cut in June, even if activity data holds up,” Citi economists said.
“Should core PCE inflation consistently print closer to 0.4%MoM, the Fed’s argument for cutting due to slower inflation would become harder to make,” they added