Kevin Warsh’s first presser rattled Wall Street, but a Citi hawk says cuts are coming

Wall Street may be buying into rate hikes later this year, but two economists are pushing a contrarian narrative that does not fit the current pricing. Using CME’s FedWatch tool, investors have priced in 77% odds that the Fed will lift the benchmark rate by a quarter-point or more by the end of the year. That backdrop is getting reinforced by a hawkish Fed signaling cycle, including Kevin Warsh’s first press briefing as Fed chair last week, which analysts read as hawkish enough to “clinch the case for tightening.”

But Citi’s chief U.S. economist, Andrew Hollenhorst, says the market is staring at the wrong direction of travel. In a note on Friday, he argued monetary policy is more likely to require rate cuts rather than rate hikes, even as the economy has looked sturdy on the surface. His argument is not based on vibes. It is a checklist: oil inflation upside is fading as conditions swing from shortage to surplus, consumer spending is weaker beneath stronger headline GDP, housing is a potential inflation brake, and payroll momentum is likely to deteriorate starting with the June jobs report.

Start with the biggest “macro control knob” everyone watches: oil. The U.S.-Israeli war on Iran sent oil prices soaring, and the market has been treating that as a continuing inflation threat. Hollenhorst’s counterpoint is that the oil story has already flipped rapidly, moving from shortage to surplus. If that dynamic holds, the key upside risk to inflation is removed. Brookings’ Robin Brooks makes the same point from a slightly different angle, arguing that market anticipation of rate hikes does not make sense because oil prices have fallen back to where they were before the Iran war started. The second-order implication for decision-makers is clear: if the inflation impulse is tied to oil shocks that are reversing, central banks can get whipsawed when they respond as if the shock is permanent.

Next, the demand data. Hollenhorst acknowledged first-quarter GDP growth came in stronger than initial estimates, but he anchored his view on real consumer spending being revised down to a multi-year low. He also argued the AI boom has created a kind of statistical mirage because it has boosted certain categories while leaving the broader picture uneven. Specifically, he noted that excluding investments in computers, electronics, and intellectual property, growth would have been just 0.5%. That matters because it changes how you interpret “growth is strong” headlines. For executives, especially those tying revenue expectations to consumer momentum, it can be an argument for planning under softer end-demand even if top-line GDP looks better.

Then there is housing and the inflation math. Hollenhorst pointed to a weak housing market potentially taking inflation down faster. He referenced the core consumer price index expected to cool to an annual rate below 2.5% by August, down from 2.9% in May. That CPI trajectory is not just a forecasting point. It is what often determines whether markets stay anchored to “hike” expectations or start repricing toward “cut.” For boards and finance leaders, CPI is the bridge between macro forecasts and internal targets, wage planning, pricing strategy, and cost of capital.

On labor, Hollenhorst’s thesis gets more pointed. He sees payrolls losing momentum this summer, starting with the upcoming June jobs report. Weekly jobless claims have been trending higher too, which supports his view that the labor market cooling will show up before the Fed has to panic. He added a market mechanics warning: “It will likely take the unemployment rate rising for the market to go back to pricing-in cuts, but soft payrolls and unchanged unemployment should at least push markets to price-out hikes.” In other words, even if unemployment does not jump immediately, the Fed does not need a crisis to pivot. Markets often reprice in stages, and payroll softness can be the first stage.

Finally, Warsh and the Fed signaling itself. Analysts at Bank of America predicted the Fed would increase rates three times this year as policymakers take more decisive action to rein in inflation after five years of seeing it above their 2% target. Against that hawkish consensus, Robin Brooks argued Warsh’s initial tone may be more theater than guidance. In a Substack post on Thursday, Brooks said last week’s FOMC meeting was “largely performative,” specifically because it was Kevin Warsh’s first appearance as Fed Chair. Brooks wrote that Warsh “had to sound hawkish to draw a clear line between himself and the White House.”

Brooks then added a catalyst for consensus change: the June CPI report, released on July 14, which he expects will start moving investors toward the cut argument. His prediction: the deflationary impulse from falling oil prices should remind everyone the Fed is not going to hike, and “if anything, the next move will be a cut.” Taken together with Hollenhorst’s labor and demand points, the contrarian view is that markets are over-weighting current policy direction and under-weighting the speed of disinflation when the oil shock fades and consumer spending weakens.

For executives, the strategic stakes are practical. If the market moves from hiking expectations to cut pricing, discount rates, refinancing costs, and funding conditions can shift quickly. It can also affect hiring plans tied to the belief that inflation will stay sticky or that the labor market will keep tightening. If Hollenhorst is right about payrolls losing momentum and CPI cooling materially by the August timeline, boards may need to stress-test plans under a faster macro turn than their current “higher for longer” assumptions. And if Brooks is right that early Fed messaging can be performance-sensitive, then the “what the Fed says next” factor matters as much as the “what the data says.” In this cycle, the biggest risk for corporate planning is not just the direction of rates. It is being late to the repricing.