Is a rate hike next week not a "fantasy"? Surging oil prices and Waller’s refusal to give guidance are making the market nervous.

Is a rate hike next week not a "fantasy"? Surging oil prices and Waller’s refusal to give guidance are making the market nervous.

With only a few days left until the Federal Reserve’s July 29 rate-setting meeting, the market’s assessment of its policy direction is highly divided—something extremely rare in recent years. Surging oil prices and persistent inflation pressure, coupled with the new chairman Walsh completely discarding his predecessor’s widely used forward guidance, have forced investors to seriously consider the possibility of a rate hike next week.

According to CME Group federal funds futures data, the market is currently pricing the probability of the Federal Reserve raising rates by 25 basis points next week at about 38%, a sharp jump from 13% a week ago. At the same time, the interest rate swap market shows the probability of a hike to be about 30%, with a 70% chance of no change. Such a large divergence so close to the meeting date is extremely rare in recent years.

The direct trigger for this shift is Brent crude breaking $100 per barrel for the first time during Thursday’s trading session, with a cumulative rise of 25% since the Federal Reserve’s June meeting. In addition, new Fed Chairman Walsh has explicitly stated that he "will not provide guidance."

Analysts believe that Walsh’s tough stance combined with the oil price shock has suddenly heightened market concerns about the inflation outlook. The Fed's preferred PCE inflation indicator read 4.1% in May, more than double its 2% target. Some economists and investors warn that if the market’s pricing for a rate hike rises further, it may force the Fed to act.

Oil Price Shock Reignites Rate Hike Expectations

Brent crude broke above $100 per barrel on Thursday for the first time since May, directly triggering renewed market concern about rising inflation.

With geopolitical tensions driving oil prices higher, gasoline and diesel prices have noticeably risen in recent weeks, putting pressure on both consumer and US industrial costs.

Mark Cabana, Head of US Rates Strategy at Bank of America, said:

"The July Fed meeting is absolutely 'live.' Whether current monetary policy is restrictive enough is itself a big question. And oil prices are now rising again."

PGIM Chief US Economist Robert Sockin described next week’s meeting as "almost a coin toss."

Walsh Offers "No Guidance," Making Market Pricing More Difficult

Another key source of market uncertainty is Walsh’s communication style, which is starkly different from his predecessor Powell.

Since taking office in May, Walsh has made it clear he will abolish the Fed's longstanding practice of signaling rate path to the market in advance, seeing forward guidance as an unnecessary restriction on policymakers when economic conditions change.

Earlier this month, Walsh testified in Congress, expressing "zero tolerance" for persistent high inflation, but gave almost no clues about the policy path.

WallstreetCN article previously wrote that Jim Bianco, President and Macro Strategist at Bianco Research, commented:

"No forward guidance means we'll frequently see probability distributions of 20%, 30%, 40%. The market is transitioning 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 before this meeting is 50% higher than in July 2025, and this unusually active trading "stems from increasing discussion over whether the market's pricing of hike probabilities is accurate, underpinned by Walsh’s heightened vigilance on inflation."

Hawkish Voices Rise Within FOMC, Economists Lean Toward Holding Steady

Meanwhile, hawkish forces within the Federal Reserve are becoming substantial.

Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have both publicly stated that the Fed has waited too long to tackle inflation, a problem that continues to trouble American families and businesses.

Minneapolis Fed President Neel Kashkari may also support a hike, even if most members opt to hold steady.

PGIM’s Sockin commented:

"Hawkish sentiment inside the Fed is approaching a critical mass."

However, influential voices within the FOMC, such as New York Fed President John Williams, prefer to wait until September to make a decision in order to observe more inflation data. June CPI data showed an inflation rate of 3.5%, lower than expected, giving credence to the wait-and-see camp.

Joe Lavorgna, Chief US Economist at SMBC Nikko Securities America and economic advisor to former Treasury Secretary Scott Bessent, directly asked, "If you can raise rates now, why wait until September?"

He also suggested that Walsh could tell Trump that fighting inflation decisively now may help lower long-term borrowing costs—"it’s a win-win."

Despite rising expectations for a rate hike, most economists still believe the Fed will leave rates unchanged next week.WallstreetCN article wrote that, according to a Bloomberg survey of 76 economists, all respondents expect the Federal Reserve to keep its benchmark rate at 3.5% to 3.75% at the July 28-29 meeting.

Former Fed official and current Chief Economist at New Century Advisors Claudia Sahm said:

"They will seriously discuss the pros and cons of a rate hike, but based on Fed officials' statements, I don't see a majority supporting an immediate hike."

Eric Wallerstein of Clocktower Group also noted that "now is not the time for a 'shock action,' as nothing in the underlying data would justify an unexpected 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 expected."

Analysts believe that this rare divergence between economists and markets is itself a microcosm of the change in market dynamics brought by Walsh's new style—in the absence of forward guidance, price signals become much noisier, and uncertainty may become the new normal.

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