Is the United States worried about stagflation? Citi insists Fed will cut interest rates in summer

The U.S. GDP growth rate in the first quarter was lower than expected, and the March core PCE price index released on Friday exceeded expectations, making the market worried that the U.S. economy may enter stagflation.

The U.S. GDP growth rate in the first quarter was lower than expected. The March core PCE price index released on Friday exceeded expectations, causing the market to worry that the U.S. economy may enter stagflation.
However, Citibank recently released a research report that although the lack of further slowdown in core inflation in March increases the possibility of an interest rate cut in July rather than June. However, Citigroup still believes that the market is wrong to completely fade away from the pricing of interest rate cuts this year.
That\’s because concerns about slowing growth will be a key factor in the Fed\’s consideration of interest rate cuts, while first-quarter GDP details show waning support for fiscal stimulus. Spending on goods is also softer.
Therefore, Citi believes that although inflation has not yet continued to slow, the Federal Reserve will still cut interest rates this summer.
Stagflation? Citi: Interest rates will still be cut this summer. Data shows that U.S. GDP grew at an annualized rate of 1.6% in the first quarter. This was lower than the market consensus of 2.5% and Citigroup was lower than the consensus forecast of 2.0%.
Among them, consumption increased by 2.5%. Expenditure on goods decreased by 0.4%. The service industry increased by 4.0%; business investment increased by 2.9%. Residential investment increased significantly by 13.9%.
Overall, private final domestic demand slowed only slightly from the fourth quarter to 3.1%.
At the same time, government spending slowed down compared to previous quarters, growing by only 1.2%.
Net exports dragged down economic growth by 0.9%, while inventories also dragged down 0.4%.
The U.S. Department of Commerce released data on Friday. The Fed\’s preferred inflation target, excluding food and energy, showed a year-on-year growth rate of 2.82% in March\’s core PCE price index, which was higher than the expected 2.7%. The previous value was revised to 2.8%.
The month-on-month growth rate was 0.3%, in line with expectations and unchanged from the previous value.
Facing stagflation-leaning data, Citigroup believes this provides an uncomfortable backdrop for Fed officials to consider when to cut interest rates this year.
But given the details of first-quarter GDP showing stronger private domestic demand, the focus may now be more on the strong inflation data.
The research report pointed out that core PCE inflation unexpectedly rose sharply in the first quarter. Core PCE inflation in March also exceeded expectations. But it is worth noting that this is in line with the Federal Reserve\’s forecast.
Citigroup had previously expected the Fed to stick to its interest rate cut in June based on the March PCE core inflation figure of 2.7%.
However, as inflation strengthened in March, Citigroup believes that the possibility of an interest rate cut in July has increased relative to June.
The research report continues to believe that it is too radical for the market to completely fade away expectations of interest rate cuts this year. It still believes that the Federal Reserve may start cutting interest rates from this summer.
Maintaining growth is key The research report pointed out that in these considerations of interest rate cuts, a key consideration will be growth concerns, because higher interest rates for a longer period will put pressure on demand.
According to research reports, although the details of GDP in the first quarter are more positive than the overall 1.6% growth, there are still signs of slowing domestic demand.
Business equipment investment is stronger than expected. But shipments are already slowing.
Nonresidential investment and government spending also slowed in the first quarter. This is consistent with weak data on construction spending as fiscal support for construction projects may have peaked.
Government spending contributed 0.2% to GDP growth in the first quarter, compared with 0.8% to 1% in each of the past five quarters.
Additionally, strong residential investment should also weaken as higher interest rates impact housing demand.
At the same time, strong consumption in the past few quarters has been increasingly driven by a few sectors, such as health care and financial services.
The research report said that inflation in these sectors has not increased in the past. Citigroup was surprised by this because it showed that actual spending was too high.
Continued strength in services spending looks shaky if it\’s based on just a few sectors.
Spending on goods also fell in the first quarter, which typically leads to a slowdown in the services sector.
Citigroup believes that on the face of it, private domestic demand and inflation were strong in the first quarter. The Fed will feel comfortable keeping interest rates unchanged.
But looking ahead, due to cracks in economic activity and labor market data, Citi expects more clear signs of growth weakness will lead the Fed to cut interest rates before inflation continues to slow.

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