As of this writing, Dec. 9, the Fed has begun its December meeting and will announce the policy decision tomorrow. It is the last meeting for 2025, and the U.S. central bank is expected to cut rates by 25 basis points, which would be its third consecutive cut. While the inflation number is stubbornly above 2%, which the Fed targets, a cooling labor market builds the case for a cut. Moreover, several leading indicators point to a slowdown in the world’s largest economy, which would mean that Jerome Powell and Co. might yet again lean towards dovishness even as they haven’t fully won the war against inflation.
A 25-basis-point rate cut is more or less priced into markets, even as Powell’s comments might still move the markets. Meanwhile, the rate cut, if it were to happen, would help bolster the prospects for the U.S. economy in 2026. Interest rates impact nearly all the sectors of the economy, even as the magnitude differs.
Banks are particularly impacted by the Fed’s policies, as the central bank influences their net interest margin (NIM) as well as the overall business. Among banking stocks, I find Citigroup (C) stock a good buy for 2026, irrespective of the Fed rate cut decision. The stock has soared nearly 53% this year, more than twice the KBW Bank Invesco ETF (KBWB). Moreover, C has outperformed the average KBWB peer by a handsome margin over the last two-year and three-year periods.
The cherry on top is the 2.1% dividend yield, which is higher than most of its large-cap banking peers. While the gap between Citi’s dividend yield when compared with other banks has narrowed amid the stock’s outperformance, it is still reasonably healthy, especially considering the fact that the S&P 500 Index’s ($SPX) dividend yield recently fell to the lowest levels since the dot-com days.
In my previous article, I had noted that Citi looks like a good buy despite the valuation rerating. The stock has since added to its year-to-date gains and hit a 52-week high yesterday. I believe the stock can still deliver more gains from these levels despite the recent outperformance.
One of the key reasons Citi shares have outperformed in recent years is because of the turnaround actions that it undertook under CEO Jane Fraser, who took over the position in February 2021. Citi had a complex structure and branched out too much, which negatively impacted its return on capital metrics. However, under Fraser—who was named Banker of the Year by Euromoney—Citigroup is a much-changed institution now, which is much leaner and more efficient. Citi has flattened its organizational structure, reduced bureaucracy, and cut its workforce to lower its cost base. It has also exited consumer banking in several international markets, which helped free capital. The bank has consolidated into five core businesses to reduce complexity and focus its energies on key businesses.
