Goldman vs Citi: Rate Hike or Cut?

The Federal Reserve's upcoming rate decision has sparked a debate between two respected firms: Goldman Sachs and Citi. Goldman Vice Chair Robert Kaplan suggests that the Fed should hike interest rates again, citing that inflation is still above target.

Kaplan argues that if the current policy rate of 3.75% is near neutral, one more hike would restore the gap the Fed wants until inflation cools down. However, this view has its weaknesses, as neutral is an unobservable estimate and reversing the previous cuts within a year would require a significant reacceleration in inflation.

Citi's head of Asia strategy Rohit Garg presents a contrasting view, calling for three Fed cuts starting in October. He notes that wage inflation in the US has returned to pre-pandemic levels and argues that this trend suggests softer services inflation, which would justify cutting rates.