The bank now predicts a quarter-point reduction by March, with the Fed holding the rate at 5% through September. Mounting signs of a slowdown in the US economy spurred treasuries to their biggest quarterly rally in four years and bolstered investor confidence that the Fed has finished raising rates.
The Fed on August 8 halted a two-year campaign of lifting rates, stating that slower growth was likely to damp inflation. There is softer growth, and with oil prices down and lower inflation, the Fed in a sense can follow the markets lead, Michael Saunders, chief Western European economist at Citigroup in London, said.
A modest ease in rates should cushion the economy. Citigroup also lowered its forecast for benchmark 10-year treasury yields to an average of 4.6% in the first quarter, from 4.9%. US economic growth slowed to a 2.6% pace in the second quarter, 3 percentage points lower than the first three months of the year.