With the Federal Reserve's July 29 policy meeting just days away, market opinions on its likely course of action are deeply divided—a scenario that has been exceptionally rare in recent years. Surging oil prices, persistent inflationary pressures, and new Chair Walsh's complete abandonment of his predecessor's forward guidance approach are forcing investors to seriously consider the possibility of a rate hike next week.
According to CME Group's FedWatch data, the market currently prices the probability of a 25-basis-point rate hike at the Fed's July meeting at roughly 38%, a sharp jump from 13% just one week ago. Meanwhile, the interest rate swap market indicates a probability of around 30% for a hike and a 70% probability of no change. Such a wide divergence this close to a meeting date is extremely uncommon in recent years.
The direct catalyst for this shift was Brent crude oil briefly breaking above $100 per barrel during intraday trading on Thursday, marking a cumulative gain of 25% since the Fed's June meeting. Additionally, new Fed Chair Walsh has made his stance clear by stating he will provide "no guidance."
Analysts believe that the combination of Walsh's hawkish rhetoric and the oil price shock has suddenly heightened market concerns about the inflation outlook. The Fed's preferred PCE inflation gauge stood at 4.1% in May, more than double the central bank's 2% target. Some economists and investors warn that if market pricing for a rate hike climbs further, it could, in turn, compel the Fed to act.
Oil Price Surge Rekindles Rate Hike Expectations
Brent crude oil briefly broke above $100 per barrel on Thursday for the first time since May, a move that directly triggered market fears of a resurgence in inflation. Due to escalating geopolitical tensions pushing oil prices higher, gasoline and diesel prices have risen noticeably in recent weeks, placing pressure on both consumers and U.S. industrial costs. Mark Cabana, Head of U.S. Rates Strategy at Bank of America, stated, "The July FOMC meeting is absolutely 'live.' Whether current monetary policy is restrictive enough is a big question, and oil prices are now rising again."
Robert Sockin, Chief U.S. Economist at PGIM, described the odds for next week's meeting as "almost a coin flip."
Walsh's 'No Guidance' Sharply Increases Market Pricing Difficulty
Another major source of market uncertainty is Walsh's drastically different communication style compared to his predecessor, Powell. Since taking office in May, Walsh has clearly stated he will abolish the Fed's long-standing practice of pre-signaling its rate path, arguing that forward guidance can unnecessarily constrain policymakers when economic conditions change. In testimony before Congress earlier this month, Walsh said he has "zero tolerance" for persistently high inflation but offered almost no clues about the policy path. As previously reported by our publication, Jim Bianco, President and Macro Strategist at Bianco Research, noted, "No forward guidance means we will frequently see probability distributions of 20%, 30%, or 40%. The market is adapting to this new way of thinking."
Agha Mirza, Global Head of Rates and OTC Products at CME Group, pointed out that trading volume in federal funds futures ahead of this meeting is 50% higher than it was for the July 2025 meeting. This unusually active trading "stems from increasing debate over the accuracy of market pricing for a rate hike, driven by Walsh's heightened vigilance on inflation."
Hawkish Voices Build in the FOMC, but Economists Lean Towards Holding Steady
Meanwhile, a hawkish faction is building momentum within the Fed. 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 burden American households and businesses. Minneapolis Fed President Neel Kashkari might also support a rate hike, even if a majority of colleagues choose to hold steady. Robert Sockin of PGIM remarked, "Hawkish sentiment within the Fed is reaching a critical mass."
However, influential voices within the FOMC, such as New York Fed President John Williams, prefer to wait until the September meeting to make a decision, allowing more time to observe inflation trends. The June CPI data, which showed an inflation rate of 3.5%—lower than expected—provides support for those advocating a wait-and-see approach. Joe Lavorgna, Chief U.S. Economist at SMBC Nikko Securities America and a former economic advisor to Treasury Secretary Scott Bessent, directly questioned, "If you can raise rates now, why wait until September?" He also suggested that Walsh could explain to President Trump that aggressively fighting inflation now could help lower long-term borrowing costs—a "win-win" scenario.
Despite the rising rate hike expectations, the majority of economists still expect the Fed to maintain the current interest rate next week. According to a survey of 76 economists by Bloomberg, all respondents expect the Fed to hold the benchmark rate steady 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 discuss the pros and cons of a rate hike, but based on the statements from various Fed officials, I don't see a majority supporting a move right now."
Eric Wallerstein of Clocktower Group also believes, "Now is not the time for a 'shock and awe' move, because there is nothing in the underlying data to justify a surprise rate hike." John Brady, Managing Director at RJ O'Brien, commented, "I still don't think the Fed will hike next week, but the market tells me the vote will be closer than I anticipated."
Analysts believe this rare divergence between economists and the market itself is a microcosm of the changing market dynamics brought about by Walsh's new style. In an era without forward guidance, the noise in price signals will amplify significantly, and uncertainty may become the new normal.
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