Stop fantasizing about a Fed bailout! Citadel Securities: Waller is determined to stick to the 2% inflation target, AI bull market faces a test.

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Citadel Securities believes that investors are underestimating Federal Reserve Chair Walsh’s determination to curb inflation, and the AI-driven stock market rally is facing increasing risks.

Citadel Securities warns that the market generally underestimates Chair Walsh’s strong will to bring inflation down to the 2% target, and this misjudgment will pose a substantive drag on risk assets.

Nohshad Shah, the company’s Head of Fixed Income Sales for Europe, the Middle East, and Africa, pointed out in a client report that the recent decline in oil prices is not enough to weaken the Fed’s case for raising rates, as underlying inflationary pressures remain high.

Shah also noted that, unlike the post-pandemic period, Walsh is sending a clear signal—high inflation has become a binding constraint for monetary policy, and the Fed will no longer act as a backstop during economic slowdowns or market declines as it has in the past. This means the “Fed put” logic the market has long depended on is unraveling.

In the field of AI, Shah warns that the AI-driven stock rally is becoming increasingly fragile. At the same time, political risks surrounding AI are mounting, and factors such as tightened regulation and rising compliance costs may weigh on related valuations.

The "Policy Put" Framework Faces Unraveling

Shah noted in the report that investors have developed a fixed expectation in the post-pandemic era: whenever the economy weakens or markets fluctuate, the Fed steps in to help. However, Walsh’s stance is breaking this logic.

“The current paradigm may be undergoing a shift,” Shah wrote. In his view, high inflation has become a constraint on policymakers, significantly reducing the likelihood of a Fed rescue during economic or market weakness—fundamentally departing from the market’s long-held faith in a “Fed put.”

Shah further noted that the recent decline in oil prices should not be seen as a sign that inflationary pressures are easing, as underlying inflation remains high, so the Fed’s rationale for rate hikes remains intact. He wrote:

“The key in the next phase is not whether the Federal Reserve raises rates once or twice, but whether investors will stop using every dip in oil prices or every period of risk asset weakness as a reason to reconstruct the old policy ‘put’ framework.”

AI Valuation Logic Under Pressure; Falling Computing Costs Are a Warning Signal

Citadel Securities also issued a warning about the AI-driven stock market rally. Shah pointed out that declining compute prices, falling AI services spending, and increasing market skepticism about whether AI investment can translate into returns all indicate the growing fragility of the uptrend.

In Shah’s view, the potential risks of AI are not limited to the economic sphere, but extend to politics as well.

He noted that while investors see AI as a driver of productivity and profit growth, workers are increasingly concerned about job losses, privacy surveillance, and corporations profiting from employees’ institutional knowledge. This will lead to stricter regulation, slower technology adoption, and higher compliance costs—even if AI technology continues to advance, these factors may weigh on related valuations.

Shah wrote:

“If the public comes to see AI trades as essentially benefiting corporations and hurting workers, the political winds will shift rapidly.”

Risk Warning and DisclaimerThe market has risks, and investment needs to be prudent. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their particular circumstances. Investing accordingly is at your own risk. ```