Global Market: Citi expects Fed to raise rates by 25 basis points in December after hot US inflation data

Hotter US inflation prompts Citigroup to revise its rate outlook, with a December hike now expected.

The revised forecast marks a shift for Citi, which had been the only major holdout expecting the Fed to leave rates unchanged for the remainder of the year, even as financial markets increasingly anticipated another rate increase in December.

Citi expects the US central bank to keep interest rates steady after the widely anticipated December hike. The brokerage also forecasts that the Fed will not begin cutting rates until June 2027.

September's inflation data showed consumer prices accelerating, driven by a surge in gasoline costs. Price pressures also broadened beyond energy, raising concerns that underlying inflation could remain persistent and complicate the Fed's efforts to bring inflation under control.

Expectations for an earlier rate increase also strengthened following the inflation report. Interest rate futures tied to the Fed's policy rate indicated a 47.1% probability of a hike at the central bank's October 27-28 meeting, up from about 22% before the data was released, according to CME Group's FedWatch tool, Reuters reported.

Markets were pricing in roughly a 94% probability of a December rate increase, reflecting growing expectations that persistent inflation could prompt the Fed to keep monetary policy tighter for longer, Reuters reported.

The latest data adds to uncertainty over the Fed's policy outlook, as policymakers weigh persistent price pressures against the broader economic impact of higher borrowing costs.