• Citigroup (C) now expects the Federal Reserve to raise rates by 25 basis points in December 2026, a sharp reversal from its prior forecast of no change this year.
  • The call comes after September’s unanimous Fed hike to 3.75%–4.00% and minutes showing most officials saw another increase appropriate by year-end.
  • Citi’s third-quarter earnings beat estimates, but higher rates cut both ways: lending income improves while underwriting and card credit face pressure.

From Dovish Outlier to Hawkish Shift

Citigroup economists have pivoted hard on U.S. monetary policy, now forecasting a quarter-point increase in December 2026—a stark departure from their earlier call for no change this year. The revision, reported Tuesday, lands as Fed officials signal that persistent inflation and resilient growth have weakened the case for holding rates steady.

The move is notable because Citi was, as recently as June, described as a longstanding dovish outlier, then expecting cuts in October and December of this year and January 2027. The new forecast represents a full about-face. According to people familiar with the matter, the shift reflects a reassessment of inflation dynamics and labor-market strength.

The Fed raised its target range to 3.75%–4.00% in September—the first increase since July 2023—and minutes released October 7 showed most participants considered another quarter-point move appropriate by year-end. One further hike would bring the range to 4.00%–4.25%, assuming no intervening change.

Why December Is the New Favorite

Timing has become as important as direction. The October 27–28 meeting is seen as too soon for another move, with December now the consensus window. Boston Fed President Susan Collins said Monday that further tightening before year-end is warranted. New York Fed President John Williams echoed that another 2026 increase could be appropriate, though he currently sees no need for a hike in 2027. RBC Economics (RY) also forecasts a December increase, followed by another in March 2027.

The Fed’s September minutes flagged three connected pressures: inflation that remains above the 2% objective with insufficient recent progress, Middle East disruptions raising energy and input costs, and strong consumer spending plus AI-related capital investment sustaining demand. The labor market remains close to full employment. Tariffs, too, have contributed to price pressures, though officials differ on how quickly those effects fade.

“What institutional investors like us are really focused on is regulatory stability,” said a person familiar with Citi’s thinking, speaking on condition of anonymity. “The macro backdrop has shifted, and our rate path has to reflect that.”

A Mixed Quarter for Citi

The bank’s own results, reported October 13, illustrate the double-edged nature of higher rates. Citi posted revenue of $23.85 billion, up roughly 8% year over year, and net income of $5.25 billion, versus $3.8 billion a year earlier—though down about 10% sequentially. Earnings per share of $2.85 topped the $2.66 analyst estimate cited by Reuters (TRI)/LSEG (LSEG.L). Return on tangible common equity came in at 11.5% for the quarter and 12.6% year to date, ahead of its 11% annual target.

Services and wealth-management revenue each rose 15% year over year. Investment-banking revenue increased 9% but fell 13% from the prior quarter as underwriting slowed. Citi raised its full-year net-interest-income growth guidance, excluding Markets, from 5%–6% to the mid-to-high 6% range.

Still, consumer-card profit fell 8% year over year, and card loss provisions rose 4% to $1.9 billion—a sign lenders are preparing for potential borrower stress. Higher rates can lift lending income, but they also weigh on financing activity and credit quality.

The Road Ahead

The revision is a forecast, not a Fed decision. Inflation, employment, spending and energy-price developments could still change the calculus. Beyond December, the outlook is less settled: Williams expects overall inflation to approach 2% during 2027, while the Fed staff’s September forecast did not see inflation reaching 2% until 2029. Those divergent views explain why agreement on one hike does not establish agreement on the longer-term path.

A higher expected policy-rate path can also raise borrowing costs before the Fed actually acts. Ahead of September’s meeting, Treasury yields rose roughly 35 basis points across the two- to ten-year segment. The Fed described financing as relatively restrictive for mortgage borrowers and small businesses, even while larger companies retained broad access to credit. A dollar appreciation should not be assumed automatically; the Fed reported the dollar weakened during the prior intermeeting period as foreign rate expectations and growth also shifted.

For Citi, the next corporate milestones are regulatory clearance—its multiyear simplification and remediation program is nearing an end—and the planned Banamex separation, expected to involve a listing and removal from consolidated accounts in 2027. The bank currently owns 51%. Jane Fraser remains chair and CEO, with Gonzalo Luchetti having taken over as CFO in March 2026. Whether those efforts bear fruit will depend in part on how long rates stay elevated.

Citigroup did not respond to a request for comment on the revised forecast.

Clarification: An earlier version of this article misstated the prior Citi forecast. It called for no change this year, not a cut.