Late-night chaos! The Federal Reserve minutes reveal a nuclear-level hawkish stance, but Citibank is going against the trend and saying: The market is wrong! Rate cuts in September?

Hey buddy, have you heard about the big move the Federal Reserve just made? The April FOMC meeting minutes just came out, and it's the most hawkish signal in nearly two years.

Here's what happened: In the document released on May 20th, it clearly states—"most" participants believe that if inflation stubbornly stays above 2%, they will seriously consider raising interest rates. "Many" officials even want to delete the language in the statement that hints at a possible rate cut.

This is a major development. You should know, the last time the Fed seriously discussed rate hikes was two years ago. Once the news broke, the two-year U.S. Treasury yield shot up, the market immediately cut back on rate cut expectations, and even started pricing in the possibility of rate hikes within the year.

But guess what? Just as everyone was panicking, Citigroup Research came out to say: the market is wrong, the pricing is overdone.

Citi economist Andrew Hollenhorst made it clear in a report on the day the minutes were released: the rise in the two-year Treasury yield and the dismissal of rate cut expectations are contrary to their assessment of the Fed’s path. Citi believes the probability of rate cuts in the next year or two is higher than that of rate hikes, and they expect the Fed to restart rate cuts in September.

Let’s take a closer look at how big the disagreement is in these minutes. Out of 12 voting members, 4 voted against—besides Governor Michelle Bowman, who insisted on a 25 basis point cut, the other three opposed because the statement still contained dovish language. Nick Timiraos from The Wall Street Journal commented that under the dual pressures of Middle East conflicts and the AI boom, the Fed, which is about to change leadership, has reshaped its interest rate outlook: officials are no longer debating "whether to cut rates," but are now seriously considering "whether to raise rates."

Compared to the March minutes, April’s hawkish tone is much stronger. In March, only "some" officials thought a balanced guidance was needed; by April, it was "many."

But Citi points out: note that these minutes reflect discussions during Chair Powell’s term and do not represent the stance of the upcoming new Chair, Waller.

Recently, a popular view in the market is that Waller is shifting away from his previous support for rate cuts. Citi directly responded: a more likely scenario is that Waller won’t push for a rate cut at the June meeting, but he will still support lowering rates eventually. Waller will have his first public appearance in June, where he will need to directly address the hawkish signals in the minutes.

What’s Citi’s logic? They expect that as monthly core inflation cools and unemployment rises, the Fed will restart rate cuts in September. In their baseline scenario, the probability of rate cuts in the next year or two is higher than that of rate hikes.

Where will the catalysts for rate cuts come from? Citi says, in the short term, there’s a lack of triggers for a major re-pricing event—unless the Strait of Hormuz blockade issue gets resolved. On the economic fundamentals front, the U.S. is currently operating at a potential growth rate of about 2%, consumer resilience remains under energy price shocks, and AI capital spending is supporting growth. Both of these factors are unlikely to suddenly reverse in the short term, so relying solely on economic data makes a major market shift unlikely.

Regarding inflation data, Citi believes the extent to which core PCE deviates from the target has been exaggerated. For the rest of the year, core PCE might still be above 3%, but that’s because the PCE index gives higher weight to AI-driven demand-driven price increases. If you exclude extreme outliers, the trimmed mean PCE is now only 2.4%, not far from the 2% target. Citi expects the future annualized core PCE to approach 2%.

So, to lower the market’s implied probability of rate hikes and boost expectations of rate cuts, it depends on when the labor market weakens. Citi believes seasonal factors will bring softer employment data in the coming months, with rising unemployment and more jobless claims, plus inflation data no longer causing anxiety—all these together will lead the Fed to restart rate cuts in September.

But the market probably won’t truly adjust its expectations for rate hikes and cuts until after the May and June employment reports are out.

In short, this is a game: hawkish Fed signals scare people, but institutions like Citi are betting that economic data will force the Fed to turn back. Which side are you on?

Remember: the market’s biggest fear isn’t rate hikes, but everyone being wrong about the direction. Citi says the market is wrong, and maybe it’s time to do the math again.

Follow me for more real-time analysis and insights into the crypto market! $BTC $ETH $SOL

#TradFi交易分享挑战 #Grayscale has purchased over 510k HYPE and pledged it #Polymarket daily hot topics