Will the Federal Reserve cut interest rates again? The data tonight is very critical.

Author: Dong Jing

Source: Wall Street Insights

Under the dual pressure of geopolitical conflicts and rebounding inflation, market expectations for Fed rate cuts are experiencing intense swings. The core of current market debate is: will the high energy prices trigger sustained inflation, or will they backfire on consumer demand, thereby forcing the Fed to cut rates?

On April 21, according to ChaseTrade, Citibank issued a clear bullish case for rate cuts in its latest research report, believing that oil supply disruptions are only temporary disturbances, and although the path to rate cuts is bumpy, the direction is clear; meanwhile, Deutsche Bank dampened optimism, warning that Fed policy is already in a neutral stance and is expected to hold current rates indefinitely.

As the two major investment banks’ views clash, the upcoming March retail sales data will be the key to breaking the deadlock. This data will not only reveal the true impact of high oil prices on core consumption but will also directly determine the Fed’s recent policy trajectory.

Citibank: Geopolitical disruptions are temporary; the overall direction of rate cuts remains unchanged

Despite ongoing geopolitical developments affecting the market, Citibank firmly believes that the path toward lower interest rates and a dovish Fed policy still exists.

The core logic of this judgment is: the impact of the Strait of Hormuz situation on oil supply is increasingly likely to be short-lived rather than a persistent source of inflation. On April 18, there were reports that the Strait of Hormuz would reopen, although later questioned, but Treasury yields and oil prices have already retreated from Thursday’s highs and remain at lower levels — which in itself reflects market pricing in a scenario of “short-lived shocks.”

The research report points out that Citibank’s logical chain is clear: short-term geopolitical conflict → non-sustained oil price shocks → no widespread inflationary pressure → Fed has the conditions to return to rate cuts.

Additionally, a series of underlying economic indicators tracked by Citibank show subtle changes in the macro-financial environment:

Liquidity and financial conditions: The scale of the Federal Reserve’s reverse repurchase agreements (RRP) has fallen sharply to near zero; meanwhile, recent financial conditions are tightening, with mortgage rates rising again.

Labor market: Recent data on job openings from Indeed shows a sideways trend, but the number of initial unemployment claims remains generally low.

Funding environment: As of now, this year’s total personal tax refunds (measured in billions of dollars) are slightly higher than the same period last year.

Tonight’s key indicator: Why is the March “control group” retail sales data so critical?

As rate cut expectations fluctuate, the upcoming March retail sales data will provide investors with firsthand clues, revealing how much high gasoline prices have reduced consumer spending on other categories.

Citibank emphasizes that investors must “strip away appearances” when interpreting this data. Due to rising gasoline prices, nominal retail sales for March will inevitably surge. However, what truly determines the Fed’s policy direction is the “control group” sales data.

The report notes that this data excludes gas station and certain specific categories, providing a more realistic and accurate reflection of whether high oil prices have led to softening consumer spending elsewhere. If the “control group” data unexpectedly weakens, it will strongly confirm that high inflation is eroding demand, providing key data support for the case of rate cuts by the Fed.

Deutsche Bank’s cold water: Policy has reached neutrality; the Fed may remain on hold indefinitely

In stark contrast to Citibank’s optimistic outlook, Deutsche Bank offers a very cautious view on the prospects for rate cuts. The bank explicitly states in its research report that the Fed is expected to maintain current rates indefinitely because the current policy is already in a neutral position.

Deutsche Bank’s pessimistic outlook is mainly based on the following core points:

Stalled disinflation: Broad inflation indicators show that the progress in fighting inflation in the U.S. has stalled.

Shift in officials’ stance to hawkish: Tracking Fed officials’ speeches shows that Waller and Mester have adopted a more hawkish tone, while most officials continue to believe the current stance is “well positioned.” Specifically:

• Waller: leaning hawkish. He noted that if the Middle East conflict becomes prolonged, it could hinder the rate cut path; a series of shocks (tariffs combined with oil prices) could trigger more persistent inflation; he also emphasized that core inflation, excluding tariffs, is close to 2%, and the labor market remains fragile;
• Mester: the most dovish voice, supporting 3 to 4 rate cuts this year, believing that the war does not change the inflation outlook over the next 12 to 18 months, and that oil shocks are temporary;
• Williams: believes policy is “just right,” raising the 2026 inflation forecast to about 2.75%, and lowering the 2026 economic growth forecast to 2%–2.5%;
• Hammack: explicitly states that rates will “remain unchanged for quite some time”;
• Goolsbee: warns that if oil prices stay at $90 per barrel, it could spread to other prices; the likelihood of further rate cuts in 2026 is low, and cuts may not happen until 2027;
• Daly: believes current policy is “in a very good position,” and if oil shocks persist until the end of the year, market pricing in “zero rate cuts” would not be surprising.

The Fed’s March meeting minutes also show that most officials expect the process of inflation returning to the 2% target to be delayed; some even discussed the need to include “balanced risks” language in the statement, implying that rate hikes are not entirely off the table.

Deutsche Bank’s hawk-dove scoring of Fed officials shows that the average score for the 2026 voting committee is 2.8 (1 being most dovish, 5 most hawkish), indicating a generally neutral leaning slightly dovish, but with dovish voices clearly in the minority.

Market pricing has completely reversed: facing persistent inflation pressures and strong economic resilience, expectations have changed dramatically. According to Deutsche Bank’s data, the market currently prices in “zero rate cuts” throughout 2026, with only one cut expected in summer 2027.

Deutsche Bank expects that, under the baseline scenario, the federal funds rate will remain at 3.63% from 2026 to 2028, with no rate cuts throughout the year.