Citadel Securities believes that the Federal Reserve's policy style is undergoing a profound change.

Written by: Bao Yilong

Source: Wall Street News

On June 19, Citadel Securities released a research report stating that under the leadership of the new chairman, Waller, the Federal Reserve has shifted from inertia-based decision-making to proactive adaptive policy formulation.

Citadel Securities warns that the market should not interpret this signal through an inertia-based mindset. Their core judgment is that the next action will be an interest rate hike, and it is likely to be imminent.

Meanwhile, the report emphasizes that the Federal Reserve will no longer continue the previous model of "pre-communicating the policy path" aimed at comforting the market. This change has significant implications for the interest rate market, the dollar, and the stock market.

Baseline Scenario: Three Rate Hikes Starting in September

The Wall Street News mentions that although the Federal Reserve did not make any moves during the June meeting, the language released a clear signal of tightening.

The statement that "the committee will achieve price stability," coupled with the economic forecast summary that raised the 2026 core PCE inflation forecast by 60 basis points to 3.3% and the 2027 forecast to 2.5%, has led the market to reasonably question the decision not to raise rates in June.

Waller stated at the press conference, "The good news is we will meet again in six weeks," and emphasized, "We still have work to do on price stability."

Citadel Securities sets the baseline scenario to complete three rate hikes of 25 basis points each within the next two years, with the timelines being September 2026, December 2026, and March 2027, and views the July meeting as a "live meeting," meaning action could be taken at any time.

The Federal Reserve forecasts that the average core PCE between 2026 and 2027 will exceed the 2% target by about 90 basis points.

According to Citadel Securities' calculation based on the inflation gap, the policy rate should be 1.5 times the inflation gap above the neutral rate, which translates to an additional tightening of 135 basis points.

If the neutral rate is assumed to be 3%, the target policy rate should fall within the range of 4.25% to 4.50%, corresponding exactly to three rate hikes.

Change in Policy Style: From Inertia to Proactive Adaptation

Citadel Securities qualitatively defines the strategic significance of this meeting as "quite significant."

In their analytical framework, the Federal Reserve under Waller is clearly more action-oriented, with the pace of policy adjustments accelerating to reduce the probability of inflation straying from the target becoming a deeply entrenched problem. The report uses a metaphor:

Timely prescription of strong medicine leads to faster recovery for the patient.

Under this logic, proactive tightening also means that once inflation risks are resolved, a shift towards easing can also happen more rapidly.

The report also points out that Waller's judgment regarding the high informational value of market prices to the central bank, and that forward guidance can contaminate that signal, is a fundamental principle of his cross-asset macro framework.

Market Impact: Dollar Benefits, Curve Flattens, Stock Market Tail Risks Decrease

Citadel Securities believes the dollar will benefit from the significant reduction in market concerns about the independence of the Federal Reserve and its commitment to inflation, leading to a decrease in both real and nominal term premiums, and the interest rate curve may further flatten.

Regarding the U.S. Treasury options market, Citadel Securities states that because the Federal Reserve is now "taking it step by step," a sudden interest rate hike is possible at any moment in the short term, making the trajectory of short-term Treasuries (such as the 2-year note) very difficult to predict, thus increasing short-end volatility.

However, because the Federal Reserve acts flexibly, there is confidence that long-term inflation will never get out of control, which in turn reduces the extreme risks for long-term Treasuries (such as the 10-year note), leading to a decrease in long-end volatility.

For the stock market, the report's wording is cautious yet clear:

A hawkish Federal Reserve is a hawkish Federal Reserve, but a more forward-looking Federal Reserve is easier to deal with than a Federal Reserve that lags behind the curve.

The logic is that proactive tightening reduces the future tail risk of being forced to implement excessively high interest rates, while also creating space for a quicker policy reversal — this represents a relatively controllable pressure path for risk assets.