For months, markets priced in continuous Federal Reserve rate cuts. That narrative has collapsed.
Citadel Securities now sees a rate hike as the most likely next move. Nohshad Shah, the firm’s macro strategy lead, described the odds of a September increase as a “coin-toss” following strong June jobs data.
On May 26, Shah warned that inflation, not the labor market, represents the greatest risk. Geopolitical turmoil is driving oil prices higher. Massive capital expenditures tied to the artificial intelligence buildout are injecting unexpected stimulus. Compounding the pressure, immigration policy shifts have tightened labor supply, forcing employers to bid up wages.
Citadel’s internal models suggest the current federal funds rate hovers near neutral. With growth expectations firm and inflation running above the Fed’s 2% target, the firm argues policymakers must act soon to avoid falling behind the curve.
For traders, the June and July inflation prints are now critical. Hot CPI or PCE data could quickly transform Shah’s coin-toss scenario into a near-certainty.