Fed faces 38pc rate-hike odds at pivotal July 29 meeting

The Federal Reserve will likely hold its benchmark rate at 3.50% to 3.75% on July 29, but surging oil prices above $100 a barrel have pushed the probability of a hike to 38%, up from 12% a week earlier, CME FedWatch data show.

"Warsh remains an enigma. No one really understands whether he means what he says or what the things he's saying mean," said Dean Lyulkin, CEO of Cardiff, a small-business loan company.

The Fed chair told Congress this month that "inflation is a choice" and vowed the "inflation surge of the last five years will be a thing of the past." Yet Warsh declined to submit individual rate projections at the June meeting, and half of the 18 FOMC participants saw room to hike before year-end while the other half saw no change. June inflation decelerated to 3.5% from May's 4.2%, and a weaker jobs report gave hawks reason to pause — but renewed U.S.-Iran hostilities have pushed crude to $100, threatening to reignite price pressures.

The decision carries outsized stakes for markets. A surprise hike would mark the first rate increase since the Fed began its current holding pattern, potentially sending the S&P 500 down 2% or more. A hold with hawkish language could push 2-year yields higher as traders reprice the September meeting. A dovish hold — which White House Economic Council Director Kevin Hassett has signaled he expects — would likely fuel a risk-on rally.

The last time the Fed faced this level of internal division was in the months before the July 2023 hike, when then-Chair Jerome Powell pushed through a quarter-point increase despite mixed economic signals. The S&P 500 fell 1.6% in the two weeks following that decision.

Warsh's refusal to offer forward guidance has amplified uncertainty. Unlike Powell, who used press conferences to telegraph the likely path of rates, Warsh has advocated for less transparency, telling lawmakers the Fed should focus on current conditions rather than future projections. That approach has left economists and traders parsing every word of the post-meeting statement for clues.

Rate Differentials Widen as Oil Surges

The jump in oil prices complicates the inflation outlook. Gasoline averaged $4 a gallon as of July 20, up from $3.87 a week earlier, according to AAA. Core inflation — which excludes volatile food and energy — fell in June, suggesting the deceleration was not solely a function of the temporary cease-fire in Iran. But if crude stays above $100, the headline number could tick back up, giving hawks ammunition at the September meeting.

Fed Governor Lisa Cook said July 15 she was willing to wait "a bit more time" but that risks remain "strongly weighted" toward higher inflation. Fed Governor Christopher Waller said two days earlier that "sternly staring at inflation until it melts before our withering gaze is not an option."

What Comes Next

Economists polled by FactSet expect the Fed to hold steady through year-end, but most describe the likelihood of a 2026 hike as "high" — a reversal from a month earlier. The next decision after July 29 comes Sept. 16, when the FOMC will have two more inflation reports and one more jobs report to assess. EY-Parthenon's Gregory Daco called it a "60-40 call" for a hold through year-end.

For investors, the July 29 meeting may offer more questions than answers. Warsh's five newly created monetary policy task forces are expected to deliver recommendations before year-end, potentially reshaping how the Fed communicates and sets policy. Until then, the central bank's direction remains unusually uncertain.

This article is for informational purposes only and does not constitute investment advice.