According to Nohshad Shah, head of fixed income sales for Citadel Securities in Europe, the Middle East, and Africa, the stock market’s strong performance makes sense—but the bond market is misjudging the Federal Reserve’s next move. In a recent blog post, Shah argues that while equities are reasonably trading near all-time highs, expectations for imminent interest rate cuts are misplaced.
Shah believes the current market environment supports a continued rise in stock prices. He points out that major risks have diminished, financial conditions have eased, and both artificial intelligence-driven investment and government fiscal expansion are fueling growth. These elements have set the stage for what he calls a potential “melt-up” in equities, especially as the S&P 500 hovers just beneath record territory.
As an example of the low expectations companies face this earnings season, Shah cites Delta Air Lines, which recently reinstated its financial guidance. This shows that even modest corporate news is enough to satisfy investors right now, given the overall bullish backdrop.
However, the same optimism seen in stocks doesn’t translate well to the bond market, in Shah’s view. He argues that traders are overly hopeful about the likelihood of Federal Reserve rate cuts happening soon. Currently, markets are pricing in a 65% chance of a 25-basis-point rate cut at the Fed’s September meeting. Yet Shah contends that this outlook is overly aggressive and may not align with actual economic conditions.
In fact, if anything, Shah believes rates may need to be increased rather than lowered. He outlines several reasons why he thinks the market has overestimated the probability of easing. Chief among these is the significant political pressure on Fed Chair Jerome Powell, largely driven by the Trump administration. Even though traders expect about 50 basis points in rate reductions by year-end, Shah sees this as a stretch.
Financial conditions, he notes, are now the loosest they’ve been in three years. The U.S. dollar has weakened significantly, unemployment remains stable, and equity markets continue to trend upward—typically a reliable forward indicator of economic health. These data points don’t support the need for looser monetary policy.
On top of that, inflation expectations are no longer declining. Instead, tariffs are beginning to influence the consumer price index (CPI), putting upward pressure on prices. While May’s CPI came in at 2.4%, projections for June (to be released Tuesday) suggest a possible increase to 2.7% year-over-year, signaling a re-acceleration in inflation.
Shah also highlights how recent policy developments under the Trump administration are altering the outlook for interest rates. He outlines three major areas of policy change—tariffs, immigration, and fiscal policy—that, in his view, all support the case for tighter, not looser, monetary policy.
Starting with tariffs, Shah notes that the average effective rate is expected to settle at around 16.5%. While that may not be high enough to trigger a recession, it still contributes to inflationary pressures—a point that several Federal Reserve members have already acknowledged.
In terms of immigration, stricter enforcement of new policies could cause net migration to drop to zero—or even enter negative territory, according to Shah. This would likely tighten the labor market even further, potentially pushing the unemployment rate down and adding wage pressure, both of which could complicate the Fed’s inflation-fighting mission.
As for fiscal policy, Shah points to the projected impact of the “One Big Beautiful Bill Act,” which is expected to boost GDP growth by 0.9% through 2026. This is a sharp contrast to what many economists anticipated earlier in the year and suggests a stronger-than-expected fiscal impulse, again weakening the case for interest rate cuts.
While there's plenty of speculation about whether Jerome Powell will remain at the helm of the Federal Reserve, Shah stresses that Powell is still firmly in charge, with 10 months left in his term. During this time, Shah believes Powell will be focused on cementing his legacy and maintaining the central bank’s credibility—goals that are unlikely to be achieved by loosening policy prematurely.
“Given the current macroeconomic setup,” Shah writes in conclusion, “I don’t see Powell cutting rates anytime soon.”
In summary, while equities continue to rise on strong fundamentals and improving sentiment, expectations for imminent monetary easing may be overly optimistic. Shah’s message is clear: the economic data and political landscape do not support the rapid rate-cut narrative that bond markets are currently reflecting. Investors may need to recalibrate their assumptions as Powell and the Fed stay cautious amid rising inflation and an improving economy.
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