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Citi economist Andrew Hollenhorst says the Federal Reserve could shift in a more dovish direction if core inflation continues to run near a 2% annualized pace, even after policymakers raised interest rates in September to guard against inflation risks. In a note reported by Investing.com on October 8, Hollenhorst argued that the U.S. economy is not overheating and that recent energy-price increases have not broadly fed through to consumer goods.
The view contrasts with the Fed’s latest meeting minutes, released October 7, which showed most officials expected another rate increase would likely be appropriate before year-end. The September meeting delivered the Fed’s first rate hike in three years. Citi’s position is a forecast, not a signal from the central bank, and depends on upcoming inflation data confirming that underlying price pressures are easing.
Citi’s proposed test for a dovish turn
Hollenhorst’s suggested benchmark is core personal consumption expenditures inflation annualizing around 2% month after month. He said Fed Chair Kevin Warsh has not specified a numerical threshold for what he considers inflation slowing at a “sufficient” pace, leaving markets to infer what evidence might change the policy discussion.
Citi expects core inflation to remain cooler over the next four months, according to the account of Hollenhorst’s note. The economist also identified a possible downside risk in September’s core inflation reading: an August increase in cellular-service prices might reverse, potentially making the next monthly report softer than expected. That possibility is not yet established by the data.
Inflation risks divide the outlook
Hollenhorst doubts higher energy costs will materially raise core inflation. He pointed to the limited pass-through of energy costs into consumer goods since prices began rising in the spring and to slower growth in real consumer incomes, arguing that households may have less capacity to absorb additional price increases.
The Fed’s September meeting minutes presented the countervailing concern. Officials discussed the risk that energy costs and other price increases could spread across sectors and become more persistent. The Associated Press reported that policymakers unanimously viewed inflation as elevated and said it had made little recent progress toward the Fed’s 2% objective.
September’s rate increase complicates the outlook
The September 15-16 meeting ended with a quarter-point increase in the federal funds target range, according to AP reporting on the minutes. Officials described the decision as a form of risk management amid upside inflation risks. The minutes also showed that several policymakers viewed rates as not restrictive, or only mildly so, and that most saw another increase as likely appropriate by the end of 2026.
Some Fed officials have since emphasized that policymakers can take time to assess the effects of the September move. New York Fed President John Williams said there was no need for urgency, while Vice Chair Philip Jefferson said officials might need more time to judge whether another hike was necessary, AP reported. Those remarks indicate that the next decision is not settled, but they do not confirm Citi’s more dovish scenario.
Data and the next meeting will test the call
The next FOMC meeting is scheduled for October 27-28, the Federal Reserve’s calendar shows. The Bureau of Economic Analysis has scheduled its September Personal Income and Outlays report, which includes the PCE price index, for October 29—after the meeting. That timing means the September PCE release will not be available to policymakers for their October decision.
The central uncertainty is whether monthly inflation readings can sustain a pace consistent with the Fed’s target while energy prices and other costs remain risks. Citi’s case rests on signs of cooling in core inflation and limited spillover from energy; the minutes show why many officials remain concerned about persistence. Until new data arrive and policymakers respond, a dovish shift remains a possibility raised by Citi, not an announced change in Fed policy.
