Citi Maintains Hawkish Expectations for Fed Despite Rate Hold - How Markets React?

Despite the Federal Reserve's decision to keep its policy rate unchanged, Citi analysts maintained their expectations for rate cuts this year. Senior economists Andrew Hollenhorst and Veronica Clark highlighted two key dovish signals from Fed Chair Kevin Warsh's press conference. Warsh's statement that he would review inflation data with a broad dataset and that rising real bond yields were already tightening financial conditions were interpreted as opening the door for rate cuts. Citi expects the unemployment rate to rise gradually and predicts three separate rate cuts in September, December, and January. These expectations suggest that potential easing in the U.S. labor market could push the Fed toward a more accommodative policy stance.

Fed's Flexibility Margin and Risks to U.S. Economic Balance Citi analysts foresee that the Fed will need to take easing steps in the latter half of the year.

■The Fed's flexibility margin will be assessed based on inflation and unemployment data - Rising unemployment rates will fuel expectations for rate cuts - Rising real bond yields are being interpreted as a tightening signal for financial conditions ## U.S. Markets' Response to Fed Policy U.S. markets are focusing on the future of the Fed's policy.

■Foreign investors reached a peak in Treasury bond purchases - Foreign exchange deposits are increasing - U.S. housing starts are stabilizing - Short-term foreign borrowing stocks are rising > The movements in U.S. markets reflect expectations about the Fed's future policy. Rate cuts, economic easing, and potential shifts in the labor market could disrupt market balance as key factors.