Is the United States facing "stagflation" concerns? Citi insists that the Federal Reserve will cut interest rates in the summer

The US GDP growth rate in the first quarter was lower than expected, and the core PCE price index for March, released on Friday, exceeded expectations, raising concerns in the market that the US economy may be entering stagflation. However, Citibank recently published a research report stating that although the core inflation in March did not further slow down, increasing the possibility of a rate cut in July instead of June, Citibank still believes that the market's complete pricing out of rate cuts this year is a mistake. This is because concerns about slowing growth will be a key factor for the Fed to consider rate cuts, and the details of the first quarter GDP show that the support from fiscal stimulus is weakening, and commodity spending is also soft. Therefore, Citibank believes that despite inflation not yet showing sustained slowing, the Fed will still cut rates this summer. Stagflation? Citibank: Rate Cut Still Expected This Summer Data shows that the US GDP grew at an annualized rate of 1.6% in the first quarter, lower than the market consensus of 2.5% and Citibank's forecast of 2.0%. Consumer spending increased by 2.5%, goods spending decreased by 0.4%, and services grew by 4.0%; business investment rose by 2.9%, while residential investment surged by 13.9%. Overall, private final domestic demand only slightly slowed from the fourth quarter to 3.1%. At the same time, government spending slowed relative to previous quarters, growing by only 1.2%. Net exports dragged down economic growth by 0.9%, and inventories also dragged down by 0.4%. On Friday, the US Department of Commerce released data showing that the Fed's preferred inflation target, the core PCE price index excluding food and energy, had a year-on-year growth rate of 2.82% in March, higher than the expected 2.7%, with a revised previous value of 2.8%. The month-on-month growth rate was 0.3%, meeting expectations and unchanged from the previous value. Faced with data showing signs of stagflation, Citibank believes that this provides an uncomfortable backdrop for Fed officials to consider when to cut rates this year. However, given that the details of the first quarter GDP show strong private domestic demand, the focus may now be more on robust inflation data. The research report points out that core PCE inflation unexpectedly rose significantly in the first quarter, and the core PCE inflation in March also exceeded expectations, but it is worth noting that this is in line with the Fed's forecasts. Based on the core PCE inflation of 2.7% in March, Citibank previously predicted that the Fed would still stick to a rate cut in June. However, with the strengthening of inflation in March, Citibank believes that the possibility of a rate cut in July has increased relative to June. The report continues to believe that the market's complete pricing out of rate cuts this year is too aggressive and still believes that the Fed may start cutting rates from this summer. Maintaining Growth is Key The report points out that a key consideration in these rate cut considerations will be growth concerns, as prolonged high interest rates will put pressure on demand. According to the report, although the details of the first quarter GDP are more positive than the overall 1.6% growth, signs of a slowdown in domestic demand are still visible. Business equipment investment exceeded expectations, but shipments have slowed down. Non-residential investment and government spending also slowed in the first quarter, consistent with weak construction spending data, as fiscal support for construction projects may have peaked Government spending contributed 0.2% to GDP growth in the first quarter, compared to 0.8% to 1% in basically every quarter over the past five quarters. In addition, strong residential investment is expected to weaken as higher interest rates affect housing demand. At the same time, in the past few quarters, strong consumption has been increasingly driven by a few sectors, such as healthcare and financial services. The research report mentioned that inflation in these sectors has not strengthened in the past, which surprised Citigroup as it indicates excessive real spending. If based only on a few sectors, the sustained strength in service spending appears somewhat unstable. Goods spending in the first quarter also declined, which typically leads to a slowdown in the service sector. Citigroup believes that at first glance, private domestic demand and inflation in the first quarter were strong, making the Federal Reserve comfortable with keeping interest rates unchanged. However, looking ahead, Citigroup expects more pronounced signs of growth weakness to prompt the Federal Reserve to cut rates before inflation continues to slow, due to cracks in economic activity and labor market data.