Citadel Securities Sees Surprise Fed Rate Hike This Week, Against Market View

Citadel Securities expects the Federal Reserve to raise its benchmark interest rate this week.

According to Bloomberg on July 27, Frank Fliat, Citadel Securities' head of macro strategy, expects the Fed to raise rates by 0.25 percentage point on Wednesday. He said such a move would reinforce Fed Chair Kevin Warsh's commitment to price stability and highlight the central bank's independence in monetary-policy decisions.

Markets may once again be underestimating the extent of the Fed's hawkish shift, Fliat said. A rate increase this week could effectively mark the end of the forward-guidance era, when the Fed signaled policy decisions well in advance.

Interest-rate swaps are pricing in about a 40% chance of a quarter-point increase at this meeting. By contrast, markets have almost fully priced in one rate hike by September.

Citadel Securities said a rate increase at this meeting would have a bigger market impact than waiting until September. An earlier-than-expected move could reshape expectations for the Fed's response to inflation, influence corporate pricing decisions and workers' wage demands, and reduce how much additional tightening may ultimately be needed.

Recent employment and inflation data have softened, weakening expectations for a July rate increase. Even so, Fliat said inflation risks remain elevated and the labor market remains stable, so the latest data alone should not lead investors to assign low odds to a hike.

Rising energy prices tied to the Middle East are also increasing the chances of a rate hike. Oil fell after the US halted daily airstrikes on Iran, but crude is still up about 20% this month amid tensions with Tehran and supply concerns around the Red Sea. Fliat added that the recent rise in energy prices could influence the Fed's rate decision.