Citadel Securities said the probability is increasing that the Federal Reserve will start raising interest rates in September as inflation becomes more widespread and persistent.
Oil prices declined after the US and Iran announced an interim peace deal to end their conflict. But inflation pressures have become more entrenched during the war, Frank Flight, the firm's head of macro strategy, wrote in a note to clients.
Easy financial conditions, ongoing supply-chain disruptions, a strengthening labor market and increased artificial-intelligence investment are combining to maintain price pressures, he said.
Fed Chairman Kevin Warsh may adopt a more hawkish stance at his first policy meeting on Wednesday, with risks building toward rate increases in September, December and March 2027, according to Flight. That view is more aggressive than current market pricing, with interest-rate swaps showing only about a one-in-three chance of a September rate hike.
"The evidence suggests policy should be moving in a clearly hawkish direction, and we think Warsh will choose to preserve inflation credibility rather than validate the market's dovish prior," Flight wrote.
Signs of rising inflation pressure are already appearing in the labor market, he said. Wage growth is accelerating fastest in cyclical industries, while a growing share of consumer-price components are rising at an annualized pace above 3%.
At Wednesday's meeting, the Fed is widely expected to remove any easing bias and signal no rate cuts this year.
Flight expects policymakers to release more hawkish forecasts that would support future rate increases. At least five officials may indicate rate hikes, alongside projections for core inflation above 3% in 2026 and a slightly lower unemployment rate, he said.
Such forecasts would point to an optimal policy path of roughly 75 basis points of policy tightening this year under a Taylor Rule framework, which links interest-rate policy to inflation and the unemployment rate, according to Flight. The Fed could shift toward a tightening bias as soon as July, setting the stage for a September hike, he said.
source https://www.investing.com/news/economy-news/citadel-securities-sees-growing-possibility-of-rate-hike-in-september-4745590
