First Fed Rate-Hike Hawk Emerges. Core Voter Kashkari Officially Pivots, Explicitly Backing One Hike by Year-End

TradingKey - Following the Federal Reserve's release of its June meeting decision, Minneapolis Fed President Neel Kashkari, a voting FOMC member this year, recently stated that he has adjusted his policy outlook for the year from "one rate cut by year-end" in March to "one rate hike by year-end." This makes him the first core official in the current cycle to explicitly pivot to a rate-hike stance.

The core support for this shift in stance is the dual rise of sticky inflation and geopolitical risks. The latest data shows that the Fed's preferred inflation gauge has risen to 4.1%, with core inflation reaching 3.4%, both hitting fresh highs of over two years. Inflation has now deviated from the 2% target for five consecutive years. Kashkari believes that energy prices pushed up by the Middle East conflict are unlikely to retreat quickly, and with insufficient certainty regarding the implementation of a US-Iran ceasefire agreement, geopolitical supply risks have not been fully cleared, meaning upward pressure on inflation remains.

Just as the June policy meeting announced a decision to hold rates steady, officials' statements have shown clear divergence, reflecting that the consensus within the Fed on the policy path is fracturing. Under the dual uncertainty of geopolitics and inflation, the tug-of-war over the direction of monetary policy this year has further intensified.

However, Citi has struck a different chord from the market, predicting a high probability of rate cuts this year and pinning its base case on a restart of the easing cycle in October.

The institution expects that the Fed's next move will be to cut rates rather than raise them, with the base case scenario being a 25-basis-point cut in October, followed by another 25-basis-point cut each in December and January 2027.

The firm stated that falling crude oil prices will drive down refined product prices in tandem, thereby neutralizing the core drivers that previously pushed inflation higher. Market-priced inflation expectation indicators have retreated alongside oil prices, with the 10-year breakeven inflation rate falling back to the low range seen before the outbreak of this round of conflict.

Citi pointed out that if Fed officials had sufficient time to digest the latest changes in energy prices, the hawkish tone of this FOMC meeting would have been significantly weakened.

The bank believes that as the impact of falling oil prices gradually manifests in the data, inflation readings will moderate in the coming months. This will help prompt more Fed officials to pivot to a more dovish stance by September, paving the way for rate cuts before the end of the year.