Citigroup's own views clash! Strategists shout that the Federal Reserve should pause interest rate cuts in December, while economists predict a 50 basis point cut

According to Zhitong Finance, Citigroup's interest rate strategists stated that the Federal Reserve should pause interest rate cuts, diverging from the predictions of Citigroup's own economists. While others on Wall Street have long abandoned the suggestion of a 50 basis point rate cut, Citigroup's economists have continued to uphold this forecast.

Citigroup strategists Jabaz Mathai and Alejandra Vazquez stated in a report on November 22: "We believe the Federal Reserve should pause its easing policy unless the employment data in December is weak. Even if the number of new jobs is weak, it can be argued that other labor market data indicates resilience in the labor market, such as the number of unemployment claims." They were referring to the U.S. non-farm payroll report for November, scheduled to be released on December 6.

Citigroup strategists suggested that investors prepare for the Federal Reserve's pause in rate cuts next month by looking at the overnight index swap (OIS) rates corresponding to the Fed's December rate decision. They first touted this trade on November 5, when the rate was 4.404%, which has since climbed to around 4.46%. At this level, the probability of the Fed cutting rates by 25 basis points is slightly below 50%.

Meanwhile, Citigroup economists maintain that the Federal Reserve will cut rates by 50 basis points in December, while acknowledging that this possibility has diminished. Citigroup economists Andrew Hollenhorst and Veronica Clark stated in this month's report that although weak non-farm payroll data for November would allow the Fed to cut rates by 50 basis points, if the U.S. unemployment rate stabilizes at 4.1% rather than rising, the likelihood of a 25 basis point cut is greater.

The Federal Reserve cut rates by 50 basis points in September, at which time there was a divergence on Wall Street regarding whether policymakers would choose a 25 basis point cut or a more substantial one. On November 7, with signs of economic recovery emerging, the Fed cut rates again by 25 basis points, while economists from Bank of America and JP Morgan have abandoned expectations for another 50 basis point cut this year.

Bond investors have generally reduced their bets on the extent of the Fed's easing next year. In addition to the strong performance of the U.S. economy and stock market, Trump's election on November 5 also sparked bets that inflation could accelerate again. OIS contracts related to next year's Fed meetings expect the Fed to cut rates by about 73 basis points over the next 12 months, to around 3.86%; just at the beginning of October, the expected terminal rate was less than 3%.

Citigroup economists expect the November non-farm payroll report to show fewer than 150,000 new jobs, while the median forecast among economists is 220,000. They stated that for the Fed to pause rate hikes in December, job growth would need to increase by at least 300,000, and the core consumer price index would need to rise by at least 0.35% in November