Citi Challenges Aggressive Fed Hikes Amid Rising Oil Prices

Citi Research is questioning whether the Federal Reserve (Fed) needs to implement aggressive interest rate hikes, despite markets pricing in such actions. According to a team led by Global Chief Economist Nathan Sheets, there is a weaker case for aggressive tightening ahead.

The Fed raised rates in September, which Citi links to a durable economy and inflation above target. However, the bank's forecast of global headline inflation at 3.5% this year suggests that tighter monetary policy may not be necessary just yet.

Citi notes that Brent crude oil prices remain near $105 a barrel, pushing its global inflation forecast nearly a full percentage point above its initial estimate. Core inflation, which strips out food and energy, is also higher, with Citi lifting its forecasts for many major economies by about 50 basis points (0.5 percentage point) since February.

The bank sees longer-term inflation expectations remaining anchored across major economies as a sign that investors still trust central banks. Similarly, J.P. Morgan expects a short cycle, with one more December hike.