"Roughly Neutral" or "Slightly Tight"? Citigroup Interprets Powell's Speech: The Threshold for Rate Cuts is Already Low, Expected to Cut Rates Three Times This Year

At the January FOMC meeting, Jerome Powell made every effort to maintain a stance of "not providing new guidance," trying to convince the market that the Federal Reserve is currently in a wait-and-see mode.

However, for astute investors, the signals released at this meeting are far more dovish than they appear on the surface. Although the Federal Reserve kept interest rates unchanged, Powell acknowledged that the current policy rate is in a "slightly restrictive" range and expressed caution regarding the so-called signs of stabilization in the labor market. This actually exposes the Federal Reserve's internal concerns about an economic slowdown.

According to Chase Trading Desk, on January 28, Citibank pointed out in its latest research report: Although the Federal Reserve is currently holding steady, the threshold for rate cuts is actually very low. Whether it is the rising unemployment rate or signs of continued easing inflation, either could quickly trigger the rate cut trigger.

Based on this, Citibank maintains its aggressive forecast, believing that the Federal Reserve will cumulatively cut rates by 75 basis points by 2026. For investors, this means that the liquidity inflection point is not far away, and the current "pause" is merely a prelude to the next round of easing. Key trading points may be in March, July, and September—these are the rate cut windows predicted by Citibank. Do not be deceived by Powell's apparent calm; the real game lies in his characterization of "restrictive" rates, which leaves ample runway for subsequent policy shifts.

Ambiguous "Neutral" vs. Clear "Restrictive"

The most intriguing detail of this meeting is Powell's description of the current interest rate level. He continues to describe the policy rate as being at the top of the neutral range, stating that the policy rate "may be roughly neutral or slightly tight."

This subtle semantic difference is crucial. If it is "accommodative neutral," it means the Federal Reserve can maintain the status quo for a long time; but if it is "slightly restrictive," it means that if inflation continues to decline, real interest rates will effectively rise, thereby excessively suppressing the economy.

Powell reiterated that most officials expect further rate cuts this year, and currently, no officials have included the option of rate hikes in their baseline assumptions. This statement effectively eliminates the risk of rate hikes and establishes a one-way downward trend for rates, with the only uncertainty being the timing.

Labor Market: Surface Stabilization vs. Underlying Weakness

The Federal Reserve made slight adjustments in its policy statement regarding the labor market, changing the previous wording of "gradually rising unemployment rate" to "showing some signs of stabilization," and removing the phrase "the risks to employment have increased in recent months." On the surface, this seems to endorse a hawkish stance.

However, Citibank points out that investors should not overinterpret this change.

Powell explicitly downplayed this modification during the press conference, warning that he "would not overinterpret this." Although he acknowledged that this could be early signs of stabilization, he also cited evidence that the labor market remains weak. He specifically referenced consumer survey data from the Conference Board, noting that the number of people who believe jobs are "plentiful" is declining, while the number of those who find jobs "hard to get" is increasing This indicates that the Federal Reserve Chairman himself does not believe that the labor market has escaped danger, and this "picky" attitude towards data suggests his tendency to look for reasons to cut interest rates.

Inflation Path: Tariff Disturbances Do Not Change Downward Trend

Regarding inflation, Powell maintained a constructive attitude, believing that inflation will continue to return to the 2% target. The current core inflation is slightly above the target mainly due to the impact of rising prices of goods related to tariffs.

Powell clearly stated, this tariff-driven strength in commodity prices is expected to fade by mid-year. Meanwhile, prices in the service sector are slowing down. This means that the Federal Reserve views the current inflation rebound as a temporary supply-side shock rather than overheating demand. As long as service sector inflation continues to decline, the Federal Reserve is confident in achieving its inflation target later this year. This qualitative assessment of the causes of inflation further clears the obstacles to interest rate cuts.

Internal Discrepancies Emerge: Waller Casts Dissenting Vote

This meeting was not unanimous, and the voting results revealed divisions within the Federal Reserve. While most supported keeping interest rates unchanged, Miran and Waller voted against, leaning towards a 25 basis point cut at this meeting.

Especially Waller's dissent, although anticipated by the market, merely confirmed his known dovish stance. In contrast, Goolsbee and Schmid preferred to maintain the status quo. This internal division indicates that even during a period of inaction, the forces supporting easing remain strong and have not been completely convinced by the so-called "robust" economic data