Citadel: "Fed Increasingly Likely to Hike Rates in September"

"Inflationary pressures are already entrenched across the economy"
"Kevin Warsh is expected to set a decidedly hawkish tone"

Citadel Securities has projected that the U.S. Federal Reserve (Fed) is increasingly likely to begin a new cycle of policy rate hikes as early as September. This outlook contrasts with prevailing market expectations for a rate hold or a possible rate cut within the year, which have strengthened following the electronic signing of a memorandum of understanding (MOU) for an end-of-war agreement between the United States and Iran.

According to Citadel Securities on the 16th (local time), Frank Flight, Head of Macro Strategy, wrote in a client note that “inflationary pressures are becoming more persistent and widespread,” and analyzed that the Fed could pursue a phased rate hike in September and December of this year, followed by March 2027.

Flight, the Head of Macro Strategy, assessed that while international oil prices have somewhat stabilized since the provisional peace agreement between the U.S. and Iran, the inflationary pressures accumulated during the Middle East conflict have already become entrenched throughout the economy.

He explained that accommodative financial conditions, supply chain disruptions, a reaccelerating labor market, and a surge in artificial intelligence (AI) investments are all supporting upward pressure on prices.

He specifically pointed out that wage growth is accelerating, especially in cyclical sectors, and that the proportion of items in the Consumer Price Index (CPI) rising at an annualized rate of 3% or more is expanding.

Kevin Warsh, Fed Governor Nominee_AP Yonhap News

Flight, the Head of Macro Strategy, predicted that at the June Federal Open Market Committee (FOMC) meeting, Fed Chair Kevin Warsh will set a decidedly hawkish tone from his very first policy meeting.

He stated, “Current economic indicators suggest that monetary policy needs to shift decisively in a hawkish direction,” and added, “Chair Warsh will focus on maintaining credibility in fighting inflation rather than endorsing the market’s dovish expectations.”

The market expects that at this FOMC, the Fed will eliminate its existing easing bias and signal that the possibility of a rate cut this year has effectively disappeared.

Citadel also projected that the Fed’s dot plot is likely to be adjusted more hawkishly than expected. The firm analyzes that at least five members may reflect the need for additional rate hikes, the core inflation outlook for 2026 may be raised to above 3%, and the unemployment rate forecast may be slightly lowered.

Flight, the Head of Macro Strategy, also analyzed that applying the Taylor rule—which guides central banks in setting the policy rate based on inflation and economic conditions—would indicate that about 75 basis points (bp; 1bp = 0.01 percentage point) of additional tightening this year would be appropriate.

Currently, the interest rate swap market is pricing in approximately a 33% chance of a rate hike in September.

This content was produced with the assistance of AI translation services.