Citi slashes US outlook, risks ‘very evident’

Citi's outlook for US economy
Citi's outlook for US economy

Citigroup on Monday downgraded its outlook for the U.S. economy for 2016-2017, saying "the risks are very evident."

William Lee, head of North America economics at Citigroup, said in a research note: "Our outlook has little potential to be surprised on the upside, but the risks are very evident on the downside."

"Recently revised and incoming data imply GDP will grow by 0.9 percent in (the first quarter) and 1.7 percent for the year," the report noted.

"Despite such tepid growth prospects, we project a slow decline in the unemployment rate to 4.7 percent by end-2016, and 4.5 percent by end-2017." He also said inflation is projected to remain subdued. The Fed has targeted a 2 percent inflation rate as one criterion for raising interest rates.

Lee said the downgrade reflected "increased evidence of the dampening effects from looming uncertainty," most notably the Federal Reserve's decision to slow plans for interest rate normalization to two increases this year.

He added: "We continue to believe there will be only one rate increase this year — likely in September, unless developments stir financial markets and/or dampen further growth prospects. In that event, December or a later meeting would be a more likely date for an increase."

Similarly, Lee said in an interview with CNBC's "Closing Bell" on Monday that the Fed's monetary policy is unanchored.

"The current Fed is much more responsive to the markets," he said. "The Fed is watching the market watching the Fed. The Fed monetary policy is no longer anchored by macro fundamentals; in fact, it reacts to not just data, but it reacts to global events and it reacts to market events."

— CNBC's Denise Garcia contributed to this article.