Double warning: The Federal Reserve should raise interest rates, risking its credibility in fighting inflation

BlockBeats News, May 27 — Citadel Securities stated that, in the context of inflation re-accelerating and the economy remaining overheated, the Federal Reserve should adjust its stance as soon as possible, otherwise it may “fall behind the curve.” The firm believes that the bigger risk to the U.S. economy right now is current inflation, not the labor market.

Citadel Securities pointed out that after the Iran-U.S. war pushed up oil prices, the U.S. April CPI rose 3.8% year-over-year, the largest inflation increase since 2023. At the same time, the AI investment boom and easing financial conditions are further stimulating economic growth. Its model shows that current interest rates are close to the “neutral rate,” which does not match market expectations of a strong economic expansion.

Former New York Fed Chair Bill Dudley also warned that there is a risk the Federal Reserve’s credibility as an “anti-inflation fighter” may be lost. He said that U.S. inflation has been above the 2% target for more than five consecutive years, long-term inflation expectations are rising, and there is currently “almost no reason to cut rates.”

Dudley also said that against the backdrop of the AI investment boom, the expansion of government debt, and questions about the independence of the Federal Reserve, concerns in the market about inflation getting out of control are intensifying.