Wall Street’s expectations for the Federal Reserve’s upcoming policy moves have shifted dramatically, with Citadel Securities now cautioning that the central bank could resume raising interest rates as soon as September 2026. This stark warning comes as inflationary pressures persist across the U.S. economy, potentially forcing the Fed to adopt a more aggressive stance than currently priced in by markets.
According to Frank Flight, head of macro strategy at Citadel Securities, the firm believes inflation is becoming entrenched, despite the recent retreat in oil prices following the U.S.-Iran peace deal. Flight argues that the economy risks falling into a “hysteretic equilibrium,” where temporary shocks leave lasting scars on price levels long after the initial trigger subsides. He points to accommodative financial conditions, ongoing supply chain disruptions, and a robust labor market as key drivers keeping inflation elevated.
Recent data underscores these concerns: headline CPI hit 4.2% in May, while the Producer Price Index soared to 6.5%, signaling continued cost pressures on businesses. Additionally, a growing share of core CPI components are rising above 3% year-over-year, suggesting broad-based price gains. The artificial intelligence investment boom adds further fuel, with Citadel estimating AI-related capex could reach $750 billion in 2026 before climbing to $1.25 trillion in 2027, tied to spending by companies like OpenAI, Anthropic, and SpaceX.
Ahead of the Federal Open Market Committee meeting on June 17, where CME FedWatch data indicates a 99.6% probability of rates being held steady, Citadel advises focusing on how Fed Chair Kevin Warsh communicates the outlook. The firm expects Warsh to adopt a distinctly hawkish tone, potentially removing any easing bias from projections and forecasting no rate cuts this year. Citadel now sees the risk skewed toward a rate hike at the September meeting, with at least five Fed officials likely signaling support for tightening. Their analysis suggests that an inertial Taylor Rule framework justifies roughly 75 basis points of increases during 2026, possibly executed in September and December, followed by another hike in March 2027.
Other market indicators align with this view. Prediction market Kalshi shows a 60% probability of a rate hike before July 2027, and a Bank of America fund manager survey found 40% of respondents expect at least one increase within the next year, up from 16% a month earlier. BNP Paribas has also shifted, now forecasting three rate hikes starting in December, citing strong employment data and inflation risks partly linked to the U.S.-Iran conflict.
For risk assets, Citadel warns that prolonged tighter policy could dampen valuations. Higher borrowing costs and reduced liquidity would likely create a challenging environment for Bitcoin and the broader cryptocurrency market if investors begin pricing in additional Fed tightening.