Citi Warns Market Expectations for Fed Policy May Be Turning Too Hawkish

Citi analysts have suggested that market expectations for Federal Reserve policy may be turning too hawkish ahead of Wednesday's decision, in which it expects a 25-basis-point rate hike.

In its base case, Citi expects the increase to be dovish, with guidance pointing away from further hikes. Chair Kevin Warsh is expected to characterize the move as a 'slight adjustment' or 'calibration', suggesting there may be no need for further increases if inflation appears to be heading back toward target.

Citi believes parts of the Fed's updated economic projections should reinforce this impression, with the median dots likely showing just one more hike this year and cuts resuming in 2027. The bank also notes that core PCE inflation projections will likely be revised down from June, reflecting methodological revisions.