With the Federal Reserve's July 29 policy meeting just days away, there is a highly unusual level of disagreement among market participants about the likely outcome. In recent years, such a split opinion so close to a decision date has been rare. Surging oil prices, persistent inflationary pressures, and a new Fed Chair who has abandoned his predecessor's style of forward guidance are forcing investors to seriously consider the possibility of a rate hike next week.
According to CME Group federal funds futures data, the market currently prices in approximately a 38% probability of a 25-basis-point rate hike at next week's meeting. This is a significant jump from just 13% a week ago. Meanwhile, the interest rate swap market indicates a roughly 30% chance of a hike and a 70% chance of rates remaining unchanged. Such a wide divergence so close to a meeting date is extremely rare by recent standards.
The direct catalyst for this shift was Brent crude oil briefly breaking above $100 per barrel in intraday trading on Thursday. Since the Fed's June meeting, oil prices have surged by a cumulative 25%. Adding to the pressure, Fed Chair Warsh has explicitly stated he will not provide forward guidance. Analysts suggest that Warsh's tough stance, combined with the oil price shock, has sharply heightened market fears about the inflation outlook. The Fed's preferred PCE inflation gauge stood at 4.1% in May, more than double the 2% target. Some economists and investors warn that if market pricing for a rate hike climbs further, it could force the Fed's hand to act.
Oil Price Shock Rekindles Rate Hike Expectations
Brent crude oil's intraday break above $100 per barrel on Thursday, the first time since May, directly triggered renewed concerns about rising inflation. With geopolitical tensions driving oil prices higher, gasoline and diesel prices have risen noticeably in recent weeks, putting pressure on both consumers and US industry. Mark Cabana, Head of US Interest Rate Strategy at Bank of America, stated, "The July Fed meeting is absolutely 'live'. The question of whether current monetary policy is restrictive enough is a big one. And now oil prices are rising again." Robert Sockin, Chief US Economist at PGIM, described the upcoming meeting as "almost a coin flip."
Warsh's "No Guidance" Policy Makes Market Pricing Difficult
Another major source of market uncertainty is the starkly different communication style of Chair Warsh compared to his predecessor, Powell. Since taking office in May, Warsh has made clear he will end the Fed's long-standing practice of signaling its rate path to markets in advance, arguing that forward guidance can unnecessarily constrain policymakers when economic conditions change. During testimony to Congress earlier this month, Warsh stated he has a "zero tolerance" for persistently high inflation but offered almost no clues about the policy path. Jim Bianco, President and Macro Strategist at Bianco Research, noted, "Without forward guidance, we will frequently see probability distributions of 20%, 30%, and 40%. The market is transitioning to this new way of thinking." Agha Mirza, Global Head of Interest Rates and OTC Products at CME Group, pointed out that trading volume in federal funds futures ahead of this meeting is 50% higher than before the July 2025 decision. This unusually active trading "stems from growing debate about the accuracy of rate hike probability pricing, which is driven by Warsh's high alertness towards inflation."
Hawkish Voices Build in the FOMC, While Economists Lean Towards Standing Pat
Meanwhile, the hawkish faction within the Fed is gaining some momentum. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have both publicly stated that the Fed has waited too long to address inflation, a problem that continues to weigh on American families and businesses. Minneapolis Fed President Neel Kashkari might also support a rate hike, even if a majority of his colleagues choose to hold steady. Robert Sockin of PGIM commented, "The hawkish sentiment within the Fed is reaching a certain critical mass." However, influential voices within the FOMC, such as New York Fed President John Williams, prefer to wait until September to decide, allowing more time to observe inflation trends. The June CPI data showed the inflation rate at 3.5%, lower than expected, providing a basis for those advocating patience. Joe Lavorgna, Chief US Economist at SMBC Nikko Securities America and a former economic advisor to Treasury Secretary Scott Bessent, posed the question, "If you can hike now, why wait until September?" He also suggested that Warsh could explain to the President that aggressively fighting inflation now could help lower long-term borrowing costs, calling it a "win-win."
Despite the rise in rate hike expectations, the majority of economists still expect the Fed to hold rates steady next week. According to a Bloomberg survey of 76 economists, all respondents predicted the Fed would maintain its benchmark rate in the 3.5% to 3.75% range at its July 28-29 meeting. Claudia Sahm, a former Fed economist and now Chief Economist at New Century Advisors, stated, "They will seriously debate the pros and cons of a rate hike, but looking at the various Fed officials' statements, I don't see a majority supporting a hike now." Eric Wallerstein of Clocktower Group also believes, "This is not the time for a 'shock and awe' move, because there is nothing in the underlying data that justifies a surprise hike." John Brady, Managing Director at RJ O'Brien, said, "I still don't think the Fed will hike next week, but the market is telling me the vote will be closer than I expected." Analysts believe this unusual divergence between economists and the market is itself a microcosm of the changing market ecology under Warsh's new style. In an era without forward guidance, the noise in price signals is likely to amplify significantly, making uncertainty the new normal.
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