Amid the dual pressures of geopolitical conflict and rebounding inflation, market expectations for a Fed rate cut are experiencing dramatic swings. The core of the current market博弈 lies in: will soaring energy prices trigger persistent inflation, or will they backfire on consumer demand and force the Fed to cut rates?
On April 21, according to Wind Information, Citi provided a clear bullish case for rate cuts in its latest research report, arguing that oil supply disruptions are merely temporary disturbances, and the path to rate cuts, though bumpy, is clear in direction; while Deutsche Bank poured cold water on this, warning that Fed policy is already in a neutral position and is expected to maintain current rates indefinitely.
As these two major investment banks clash, the upcoming March retail sales data will be a key litmus test to break the deadlock. This data will not only reveal the true destructive impact of high oil prices on core consumption but will also directly determine the Fed's near-term policy path.
Citi: Geopolitical Disturbances Temporary, Direction Towards Rate Cuts Unchanged
Although the market continues to be affected by geopolitical developments, Citi firmly believes that the path to lower rates and a more dovish Fed policy still exists.
The core logic behind this judgment is: the impact of the Strait of Hormuz situation on oil supply is increasingly likely to be short-lived, not a persistent source of inflation. On April 18, there were reports that the Strait of Hormuz would reopen. Although this was later questioned, Treasury yields and oil prices have both retreated from Thursday's highs and remained at lower levels—this in itself is the market pricing in a "transient shock" scenario.
The report points out that Citi's logic chain is clear: Geopolitical conflict is temporary → oil price shock is not persistent → inflationary pressure does not spread → the Fed has the conditions to return to the rate-cutting path.
Furthermore, a series of underlying economic data tracked by Citi shows subtle changes in the macro-financial environment:
Liquidity and Financial Conditions: The Fed's reverse repo (RRP)规模 has fallen sharply to near zero; meanwhile, recent financial conditions are tightening, and mortgage rates are also trending up again.
Labor Market: Indeed job openings data has recently shown a sideways trend, although initial jobless claims overall remain low.
Capital Flows: So far this year, personal tax refunds (cumulative amount in billions of dollars) are slightly higher than the same period last year.
Tonight's Litmus Test: Why is the March "Control Group" Retail Sales Data Key?
As rate cut expectations waver, the upcoming March retail sales data will provide investors with first-hand clues, revealing the extent to which high gasoline prices have cut into consumer spending on other categories of goods.
Citi emphasizes that investors must "look past the surface" when interpreting this data. Due to rising gasoline prices, nominal retail sales for March are bound to surge. However, what truly determines the Fed's policy direction is the "Control group" sales data.
The report points out that this data excludes sales at gas stations and certain specific categories, allowing for a more genuine and accurate reflection of whether high oil prices are causing consumer weakness in other areas. If the "control group" data unexpectedly weakens, it will strongly corroborate that high inflation is backlashing on demand, thereby providing key data support for the Fed's rate-cutting logic.
Deutsche Bank's Cold Water: Policy Already Neutral, Fed May Hold Steady Indefinitely
In stark contrast to Citi's optimistic expectations, Deutsche Bank offered a very cautious judgment on the rate cut outlook. Deutsche Bank clearly stated in its report: The Fed is expected to maintain current rates indefinitely because current policy is already in a neutral position.
Deutsche Bank's pessimistic expectations are mainly based on the following core points:
Stalled Disinflation: Broad inflation indicators show that progress in the US fight against inflation has stalled.
Officials Turn Hawkish: Deutsche Bank's tracking of Fed officials' speeches shows that officials like Waller and Miran (Note: likely a typo, possibly meant Mester or another official) have adopted a more hawkish tone, while most other officials continue to believe the current policy stance is "very appropriate" (well positioned). Details as follows:
· Waller: Leaning hawkish. He noted that a prolonged Middle East conflict would block the path to rate cuts; a series of shocks (tariffs叠加 oil prices) could trigger more persistent inflation rises; he also emphasized that core inflation, excluding tariff effects, is close to 2%, and the labor market has vulnerabilities;
· Miran (Note: likely a reference to another official, possibly a misspelling): Is currently the most dovish voice, supporting 3 or even 4 rate cuts this year, believes the war has not changed the inflation outlook 12 to 18 months out, views the oil price shock as temporary;
· Williams: Believes policy is "right where it needs to be," raised 2026 inflation forecast to about 2.75%, lowered 2026 economic growth forecast to 2% to 2.5%;
· Hammack (Note: likely Harker): Clearly stated that rates will "remain unchanged for quite some time";
· Goolsbee: Warned that if oil prices persist at $90 per barrel, it could spill over to other prices; further rate cuts in 2026 are unlikely, cuts might have to wait until 2027;
· Daly: Believes current policy is in a "very good place," if the oil price shock lasts until year-end, it wouldn't be surprising for market pricing to shift to "zero cuts".
The Fed's March meeting minutes also showed that the vast majority of officials believe the process of inflation returning to the 2% target will be delayed; some officials even discussed the necessity of adding "two-sided risks" wording to the meeting statement,暗示 the possibility of rate hikes is not completely ruled out.
Deutsche Bank's hawk-dove scoring of Fed officials shows the 2026 voting committee has an average score of 2.8 (1 being the most dovish, 5 the most hawkish), overall leaning neutral-slightly dovish, but dovish voices are clearly in the minority.
Market Pricing Completely Reversed: Facing persistent inflationary pressures and strong economic resilience, market expectations have drastically changed. According to Deutsche Bank's data, current market pricing expects "zero rate cuts" for the entirety of 2026, with the first cut not until Summer 2027.
Deutsche Bank expects, under its baseline scenario, the federal funds rate will remain at 3.63% throughout 2026 to 2028, with no rate cuts for the entire year.
