Citadel Securities has shifted its forecast, anticipating the Federal Reserve will raise interest rates by 25 basis points on Wednesday, challenging the broader market consensus that expects no change.
Frank Flight, Citadel’s head of macro strategy, outlined this stance in a client note, emphasizing that market participants might be underestimating the Fed’s hawkish pivot. Flight argued that acting sooner rather than later would influence how inflation is tackled, shaping business pricing strategies and wage negotiations in a way that could lessen the need for harsher tightening down the line.
Flight highlighted that despite recent softer payroll and inflation figures lowering expectations for a July hike, inflation risks remain persistent and the labor market stable enough to justify a rate increase. According to the firm, this early move aligns with commitments to restore price stability more effectively.
Market Reaction and Odds Shift
Meanwhile, traders have reacted by increasing the likelihood of a rate hike. The CME FedWatch tool showed a jump in probability from 25.7% last week to 37.9% on Tuesday for a 25 basis point hike. Other prediction markets like Kalshi and Polymarket price the chance slightly lower but have also seen sharp increases in activity and volume, with Kalshi’s contracts trading over $45 million recently.
Despite this, economists remain largely cautious. A Reuters survey of 104 forecasters conducted in mid-July found no one expecting a rate change at this meeting.
