The Federal Reserve should shift closer toward hiking interest rates as rising consumer prices become the dominant threat to the economy, according to Citadel Securities.
"Inflation, not the labor market is the greater risk," Nohshad Shah, head of EMEA fixed-income sales, said. "The Fed should take note and adjust their stance soon, lest they get behind the curve."
The warning comes after the jump in oil prices since the start of the US-Iran war caused the biggest surge of inflation since 2023.
US financial conditions have eased due to the stock market's rally on the back of what Shah called a "once-in-a-generation AI transformation." The flood of investment spending on the technology is also adding fuel to the pace of growth.
Citadel's model suggests the Fed's current rate is near the neutral level that neither stimulates growth nor constricts it. Shah said that stance is inconsistent with market pricing indicating that the economy will expand at a solid pace.
Fed officials have turned more hawkish lately. A majority of policymakers have warned that the Fed may need to consider raising rates if inflation remains persistently above its 2% target, according to minutes from the central bank's April meeting.
Interest-rate swaps show that it's unlikely to increase rates until late October at the earliest, though a quarter-point hike is seen as virtually certain by early next year. Bond yields have also jumped sharply since late February amid renewed concerns about inflation.
The bond market is awakening to the reality of a hot economy with risks of a classic demand-induced inflation process, Shah wrote.
President Donald Trump has repeatedly criticized the Fed for not cutting interest rates more deeply. The rise in inflation is complicating the job for Fed Chair Kevin Warsh, who Trump appointed to lead the bank and who has a presumed goal of avoiding a hiking cycle, Shah said.
Recent data suggest the energy shock is beginning to feed into broader price-setting behavior, while consumer inflation expectations are moving in the wrong direction, he wrote.
The labor market is showing signs of re-accelerating rather than cooling. Weekly ADP data suggest that private-sector hiring is running at a pace that, if sustained, is consistent with 170,000 to 180,000 monthly job gains.
Fed officials have acknowledged that breakeven payroll growth may now be close to zero because of the crackdown of immigration. The current pace of job creation risks reigniting wage pressures, Shah said.
In that scenario, rate hikes would become difficult for any Fed Chair to avoid, Shah wrote.
source https://www.investing.com/news/economy-news/fed-should-move-toward-hiking-rates-as-inflation-rises-says-citadel-securities-4710468
