Citi chief economist: 4 rate cuts are still in the cards, but be careful what you wish for

Despite all the fuss about rising inflation, one influential economist still predicts four rate cuts this year, but there’s a catch.

In an interview with Bloomberg, Citi’s chief U.S. economist, Andrew Hollenhorst, said the Fed will cut rates because the economy inevitably headed for a “hard landing.”

“The reason I think the Fed’s going to see enough to cut is because we’re more toward the hard landing end of the spectrum,” he said.

According to him, when a recession hits and unemployment rises, the Fed's focus will shift its focus from battling sticky inflation to managing the downturn.

“We’re in the higher-for-longer stage of the policy cycle,” Hollenhorst said of stubborn inflation preventing rates from declining.

“The next stage of the policy cycle is a weakening of the labor market. Once it starts gradually weakening, it then weakens more sharply. I think that’s exactly what’s playing out now,” he explained.

Although unemployment is still at historic lows, Citi’s contrarian economist thinks it's only a matter of time before more Americans are out of jobs.

U.S. economy shows signs of weakening

After exceeding expectations for much of 2023, the U.S. economy began the year on a softer note.

In the first quarter of 2024, GDP growth dropped in half, recording an annualized rate of 1.6%—the slowest pace in nearly two years.

Meanwhile, new hires fell to just 175,000 in April, far below forecasts and the smallest gain in six months. The unemployment rate ticked up to 3.9%.

“Overall, the April jobs report paints a picture of a labor market that is slowing but not weakening imminently,” JPMorgan analysts wrote.

A deeper dive into the job data reveals a more troubling picture.

As it turns out, a record number of Americans are working part-time positions with less job security—something economists say may be inflating the official jobs numbers.

“Job creation [has been] skewed toward part-time positions,” said Thomas J. Hartfield, founder of Harfield Financial & Insurance Services.

ZeroHedge analyzed Philadelphia Fed data and found that part-time workers inflated the official nonfarm payrolls figures by 800,000 last year.

If part-time jobs are removed, the true average monthly payroll increase in 2023 was only 130,000, not the 230,000 reported.

Citing data from Rosenberg Research, Georgetown economist Robert Barone said full-time jobs had decreased by 1.3 million in the past year through February.

While government data “counts full-time and part-time jobs as equal, logic tells us something different,” Barone wrote in a Forbes op-ed.

“The fact that full-time jobs are disappearing indicates a weakening economy despite the headline [nonfarm payroll] numbers.”

Although the Fed isn’t fussed about counting full-time versus part-time workers, the data suggests the labor market and economy may be slowing faster than the central bank expects.

What does the Fed do next?

Citi’s chief economist is clearly in the minority for predicting four rate cuts this year, but experts still expect the Fed to act sooner rather than later.

JPMorgan chief U.S. economist Michael Feroli thinks the Fed will begin cutting rates in July.

“[W]e believe that if the next two job reports show continued cooling in labor market activity, then the Fed will be comfortable taking back some of its policy restraint,” Feroli told Reuters.

Although the Fed hasn’t given a precise timeline for rate cuts, Chairman Jerome Powell recently shrugged off apparent inflation risks.

His “glass half full” outlook on inflation took markets by surprise following a consecutive streak of worse-than-expected CPI data.

Powell even laughed off speculation that the U.S. economy was entering a “stagflation” era marked by high inflation and rising unemployment.

“I don’t really understand where talk of a stagflation scenario is coming from... I don’t see the ‘stag’ or the ‘flation,’” Powell said.

The Fed will hold its next policy meeting from June 11-12.