Citi forecasts 8 straight Fed cuts as recession looms

Wall Street analysts are throwing the Fed’s latest interest-rate forecasts out the window.

In a recent note to clients, Citi analysts led by chief U.S. economist Andrew Hollenhorst said a weakening economy would force the Fed to begin a rate-cut cycle in September.

According to Citi estimates, the Fed will trim rates by a quarter point at the next eight meetings, bringing the target for the federal funds rate down to 3.5% by July 2025.

“A continued softening of activity will provoke cuts at each of the subsequent seven Fed meetings, in our base case,” the analysts predicted.

That’s in stark contrast to the Fed’s latest forecast, which called for only one rate cut in 2024 and four reductions next year.

One of the analysts’ biggest red flags was the softening of the U.S. jobs market. Although employers added 206,000 jobs in June, the unemployment rate ticked up to 4.1%, the highest in nearly three years.

Citi said the unemployment is now dangerously close to triggering the “Sahm Rule,” which signals the start of a recession.

The analysts cautioned that the recession indicator could be triggered in August if the unemployment rate continues to rise at its current trend.

The job market is weaker than it appears

A rising unemployment rate is a red flag in and of itself, but a deeper examination of after-fact data revisions reveals a much more troubling picture.

This usually happens after the Bureau of Labor Statistics reports strong job growth figures for the previous month, only to quietly revise the data a few months later.

For example, nonfarm payroll growth was revised down by a combined 101,000 last August and September. That means, by the government’s calculations, the economy created 101,000 fewer jobs than what was initially reported.

It turns out this isn’t a one-off but part of a much bigger problem.

As economist David Rosenberg recently reported, payroll figures were revised down by a combined 111,000 in April and May, which he described as “a big deal.”

“Since the start of 2023, we have seen the data get revised lower 85% of the time,” Rosenberg wrote.

“Only once before (in 1986 when the Fed was slashing rates in any event), have we seen this magnitude of payroll revisions to the downside in a 12-month period not portend an economy slipping into recession.”

A weaker job market lends to the Conference Board’s opinion that the economy is slowing faster than expected in 2024.

“This weakness, in our view, should help lower inflation more rapidly,” wrote Conference Board senior economist Erik Lundh, who said he expects multiple rate cuts in 2024.