Why this economist still thinks the Fed will cut in June

Expectations for a June interest rate cut by the Federal Reserve are beginning to fade, as markets now anticipate the central bank may delay rate reductions until later in the year amid persistently hot inflation data. One person who is sticking with June is Citi Global Economist Rob Sockin.

Sockin acknowledges that the timing of a potential Fed rate cut is a "close-call," noting that the recent inflation data "has come in a lot stronger than expected." He explains that with economic activity continuing to show robust momentum, markets have pushed out their expectations for when the central bank may begin an easing cycle.

However, Sockin still believes there will be "enough evidence" that inflation is moderating for the Fed to start cutting rates in June. However, he points out that sectors like services inflation remain "very sticky" globally, forcing central banks worldwide to adopt a more cautious stance as they "worry that the services side of the inflation might be longer lived than they had originally thought."

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This post was written by Angel Smith

Video transcript

SEANA SMITH: The market expectations on rate cuts have moved to September for many of the banks. At least several of the big banks pushing out their previous June rate cut expectations to later on this year. One company though that's on your screen right now that hasn't is Citi still expecting a June cut. So let's talk about that with Robert Sockin. He is Citi's senior global economist here to break it all down. Robert, it's great to have you here. So talk to us just about-- walk us through your expectation and why you think June is still in play for the Fed to cut rates?

ROBERT SOCKIN: Hello, thanks so much for having me. Yeah, it's a very close call about when the Fed might start cutting rates. I think this is still a Fed that would like to get the easing process started at some point this year. But the inflation data for the first quarter has come in a lot stronger than expected. And at the same time, the activity data has come in more robust than expected as well. So that combination of factors, I think is leading to exactly what you said, people to push out their calls for rate cuts as well as markets to push out as well.

We still think there's going to be enough progress in inflation. By the time you get to that June meeting that there'll be enough evidence that the Fed is willing to start that easing cycle. Now after that, it could be a very gradual easing cycle depending on how inflation and the economy hold up. But on balance, we're holding to that because I think they're going to be enough evidence that they could get that started. But as I said, of course, the risks are shifting to a later start and to a slower grind down of the policy rate.

BRAD SMITH: Is that because we were stuck on transitory for so long or is there something else that is now at play, Robert?

ROBERT SOCKIN: I think it's with the inflation element. We're still seeing very sticky services inflation that look like it was coming down pretty significantly as goods inflation was also falling. But it's stalled out, not just in the US, but also globally we're still seeing in a lot of economies extensive services pressure. So I do think that you're seeing central bankers in general being cautious because they're worried that services side of the inflation might be longer lived than they had originally thought.

And as I said at the same time, if you look at the US, the economy is particularly resilient. So the Fed may be in no rush to cut if it's worried about inflation being stickier for longer.

SEANA SMITH: Robert, if we don't see a cut in June or July, would that be a mistake?

ROBERT SOCKIN: I think, again depends on the outlook, the economy has been surprisingly a significantly to the upside. We just saw very strong numbers come out of the IMF for what it expects the US to grow. So I think if you're in an environment where the economy is growing that well. And inflation is coming down slowly, then it makes sense for the Fed to potentially show some patience. Now there are some signs that some things are softening in the US.

We're seeing some labor survey data look a bit softer. Some seeing some strains on lower income consumers. So it's going to depend on how the outlook evolves. But I think if the data continue the way that they are, I think the Fed can be patient. So it all depends if the data in the second quarter looks like it's looked in the first quarter.