Citadel predicts the Federal Reserve will deliver a surprise rate hike at July FOMC

The market disagrees - expects the Fed to hold. [https://finance.yahoo.com/economy/policy/articles/citadel-securities-sees-warsh-delivering-214213265.html](https://finance.yahoo.com/economy/policy/articles/citadel-securities-sees-warsh-delivering-214213265.html) Citadel Securities expects the Federal Reserve to raise interest rates this week, a surprise move strengthening Chairman Kevin Warsh's credibility in the battle with inflation. A quarter-point increase on Wednesday would reinforce Warsh's repeated pledge to restore price stability while showing policymakers no longer rely on signaling every policy move well in advance, Frank Flight, the firm's head of macro strategy, wrote in a note. "The market may once again be underestimating the extent of the hawkish shift at the Fed," Flight said. A hike this week "would emphatically end the forward guidance era" while underscoring the Fed's independence, he said. Interest-rate swaps imply about a 40% chance of a quarter-point increase on Wednesday, an unusually high degree of uncertainty so close to a Fed decision by the standards of recent years. Traders are fully pricing in a rate hike by September. A move this week would have a greater impact than waiting until September because it would reshape expectations about how the Fed responds to inflation, according to Flight. In addition to supporting the central bank's inflation-fighting credibility, a surprise increase would influence businesses' pricing decisions and workers' wage demands before inflation becomes more entrenched, potentially reducing the amount of tightening needed later, he said. While the recent softer payroll and inflation data initially reduced the perceived likelihood of a July move, Flight argued those reports should not outweigh broader evidence that inflation risks remain elevated and the labor market is stable. Meanwhile, the geopolitical backdrop in the Middle East remains volatile, with oil prices sinking on Monday as the US paused daily strikes against Iran. Despite the recent easing in tensions, prices are still up about 20% this month as the Iran-backed Houthis threaten Saudi exports from the Red Sea. The energy price increases in recent weeks may tip the balance toward a hike, he added.