Citi shifts to December rate hike outlook after CPI tops forecasts

By dropping its opposition to a December move, Citi is among the last major banks to fall in line, and the discussion now centres on timing rather than whether the Fed will act again. The volatility in pricing for the October meeting — which surged after the CPI release before pulling back — reflects trader uncertainty about the schedule, with any Fed official comment likely to move the market ahead of that gathering. A policy path that stays elevated for longer, with cuts not arriving until mid-2027, tends to boost the dollar and Treasury yields while pressuring rate-sensitive securities. What stands out is the core: inflation that is broadening past gasoline is more difficult for the Fed to ignore than a mere energy-driven spike.

The hot CPI numbers converted Citi from a Fed doubter into a December rate-hike proponent, leaving markets to wonder if an October increase could come first.

Key points:

• Citigroup now forecasts a 25bp Fed lift in December, having previously projected no further moves this year.
• The bank sees rates unchanged after December, with the first cut not until June 2027.
• September headline CPI came in at 3.7% year over year, up from 3.4% and above the 3.6% expectation, with a 0.6% monthly increase driven by gasoline.
• Core CPI rose to 2.6% from 2.4%, beating the 2.5% estimate and pointing to inflation pressures spreading past energy.
• Futures markets assign about a 94% probability to a December hike.
• CME FedWatch showed the odds of an October 27–28 move spiking to roughly 47% after the data from about 22%, then easing to around 32%.

Citi now expects the Federal Reserve to raise interest rates by 25bp in December, after September's US inflation exceeded expectations. The bank had earlier predicted no additional Fed action this year, even though market pricing had already leaned heavily toward a December rise.

Citi also said it sees the Fed holding steady after that December move, with no cuts before June 2027.

Wednesday's Consumer Price Index report revealed headline inflation climbing to 3.7% in the year to September, from 3.4% in August, slightly above the 3.6% consensus. The monthly increase was 0.6%, matching forecasts, led by a surge in gasoline costs. The more concerning development for policymakers was that price rises extended beyond energy. Core inflation, which excludes food and energy, advanced to 2.6% from 2.4%, above the 2.5% estimate, with a monthly gain of around 0.3% versus a predicted 0.2%. This raised worries that underlying inflation might be sticky.

Financial markets reacted quickly. Rate futures indicated close to a 94% chance of a December hike. Pricing for the October 27–28 meeting also moved sharply. CME Group's FedWatch tool showed the implied probability of an October increase jumping to about 47% after the release, from roughly 22% before, then pulling back to approximately 32% at the time of writing.

The shift makes the October meeting a true decision point rather than a formality. Investors still see a December action as near-certain, but the timing of the next hike has become a subject of debate.

Citi's change matters because it brings one of the major Wall Street forecasters in line with market pricing. It also signals that a single inflation report revealing broad price pressures can shift expectations. The focus now turns to Fed speakers before the October meeting and to upcoming inflation data, including September's PCE figures, to see whether price pressures are spreading or easing.