- The economy is slowing, and the Fed could cut rates eight times
- The jobs report shows signs of weakness
- What impact could it have in the crypto world?
Citi Predicts Prolonged Federal Reserve Rate Cuts
Analysts at Citi Research said the Federal Reserve could cut interest rates for a long time.
The bank said the economy is slowing, and the Fed will cut rates eight times, by 25 basis points, starting in September and ending in July 2025.
The benchmark rate could drop by 200 basis points, from 5.25%-5.5% to 3.25%-3.5%.
The economy has slowed down from its fast pace in 2023, with inflation slowing down after some unexpected stickiness, according to Citi analysts led by chief U.S. economist Andrew Hollenhorst.
Indicators of Economic Weakness and Imminent Rate Cuts
The Institute for Supply Management’s service-sector gauge and the monthly jobs report has raised the risk of a sharper weakening of economic activity and faster rate cuts.
Data and comments from Fed Chair Jerome Powell suggest that the first-rate cut might come in September.
“A continued softening of activity will provoke cuts at each of the subsequent seven Fed meetings, in our base case,” Citi predicted.
The note also mentioned other signs of weakness in the jobs report. The headline payroll gain of 206,000 looks good, but previous months were revised down. June saw a decline of 49,000 temporary service jobs.
Citi Called it “the type of decline that is typically seen around recessions as employers begin reducing labor with the least strongly attached workers.”
It said the unemployment rate, derived from a separate survey, is a better indicator than the payroll data, which may be inaccurate.
On that note, Citi mentioned the “Sahm Rule” recession indicator, which could be triggered in August if unemployment keeps rising at its current pace.
Hollenhorst’s Economic Outlook and Policy Insights
Citigroup’s top economist, Andrew Hollenhorst, has been a bit of a contrarian this year, sticking to a more negative view of the economy despite the Wall Street consensus shifting to a soft landing.
He said the U.S. is headed for a hard landing in May and that Fed rate cuts won’t help. This was pretty much the same forecast we got in February, even though the jobs figures were impressive.
In an interview with Bloomberg TV on Wednesday, Hollenhorst said that if the economy takes a downturn, there’ll probably be enough political support for the government to spend more money to get the economy moving again.
A mild recession might not lead to a consensus, he added.
He said that rate hikes slowed the economy less than expected, and rate cuts haven’t stimulated it as much.
Additionally, 10-year bond yields, which are used as benchmarks for many borrowing costs, are already below 2-year yields. This indicates there might be limited room for them to go down, especially with deficits and inflation on the rise.
“Most economic activity is going to be more responsive to a 5-year yield, the 10-year yield. It’s not really about the overnight policy rate,” Hollenhorst explained. “So there really are questions about how much can you transmit that stimulative effect of lower policy rates.”
What Could This Mean for the Crypto World?
- Investors may seek higher returns as interest rates fall, increasing demand for cryptocurrencies such as Bitcoin and Ethereum, which are considered alternatives to traditional asset classes.
- Accommodative monetary policies could foster a more favorable economic environment for cryptocurrency adoption by both financial institutions and consumers.
- The interest rate cut could lead to more volatility in cryptocurrency markets, with price swings due to investor expectations and available liquidity changes.
