As the Federal Open Market Committee (FOMC) kicks off its two-day meeting, analysts at Citi said in a note Tuesday that the risks are skewed towards a dovish outcome.
The investment bank explained that in tomorrow's press conference, Federal Reserve Chair Jerome Powell will address a market that is currently pricing in about 65 basis points of rate cuts for this year, despite the median Fed "dot" indicating just a 25 basis point cut in June.
Citi analysts wrote, "Risks skew dovish as Powell is unlikely to push back against the potential for cuts at every upcoming meeting."
The bank's perspective comes amid a backdrop of softer inflation readings, partly driven by a persistent slowdown in owners' equivalent rent, which has led the market to anticipate over 2.5 rate cuts.
The median "dot" at the June FOMC suggested only a single 25 basis point cut this year, defying expectations.
However, Citi does not expect Powell to challenge the dovish market pricing. They state that if Powell wanted to signal a more hawkish stance, he could imply that the pace of rate cuts might be "gradual," which the market could interpret as a move towards quarterly rate cuts.
However, given the current economic indicators—slower inflation, rising unemployment, and recent equity market volatility—Citi sees little reason for Powell to oppose the market's expectations.
Instead, they believe Powell is likely to suggest that the market's pricing is in line with the data, just as the Fed's policy decisions are. "He might even go so far as to offer that neither a 50bp cut or cuts at consecutive meetings are off the table," Citi analysts state.
The bank believes that not pushing back against the priced-in cuts could lead the market to more fully price the 75 basis points of cuts that Citi expects this year.