Nearly 50%! The market expects a rising probability of a Fed rate hike this month.
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The dual impact of soaring oil prices and hawkish statements by Federal Reserve officials is pushing market expectations for a Fed rate hike in July to a tipping point.
On Monday, money market pricing showed that the probability of a 25-basis point Fed rate hike this month had risen to nearly 50%, up from less than 40%. Driving this shift was Fed Governor Christopher Waller’s strongest hawkish signal yet—he stated that if this week’s inflation data is again hot, the FOMC will need to consider tightening monetary policy soon. Meanwhile, escalating geopolitical tensions sent Brent crude’s single-day maximum increase close to 10%, further reinforcing market concerns over persistent inflationary pressure.
US Treasury yields immediately rose across the board. The 2-year US Treasury yield, which is most sensitive to Fed policy expectations, rose about 7 basis points in one day to 4.28%, the highest since February 2025; the 10-year yield climbed to 4.62%, hitting a new peak since May.
This week’s focus will be on the US June CPI data released on Tuesday and Fed Chair Kevin Warsh’s testimony before Congress. The market generally believes that these two events will decisively influence the policy direction of the July 29 FOMC meeting.
Waller Sets Conditions for Rate Hike Trigger
Waller’s statement on Monday is viewed by the market as the clearest warning yet for a rate hike.
WallstreetCN article wrote, "New Fed Newsletter" Nick Timiraos reported that Waller stated clearly:
"If we see another hot core inflation report this week, the Federal Open Market Committee will need to consider tightening monetary policy soon."
Waller noted that the Fed's preferred inflation indicator—the core Personal Consumption Expenditures (PCE) index excluding food and energy—had an annual increase of 3.4% as of May, and has been rising steadily since January, well before the outbreak of the US-Iran conflict.
He stated that factors driving inflation higher include tariffs, energy prices, and large-scale AI infrastructure construction. "However you measure it, inflation is rising this year," he said, "I am currently concerned about the trend of elevated core inflation."
Waller's comments are consistent with the direction of last month's FOMC meeting minutes—the minutes show that half of the 18 officials expect at least a 25-basis point hike at some point this year, with rate hike options moving from fringe topics to the center of policy discussion.
At the same time, the sudden escalation of geopolitical tensions is fueling inflation expectations. After a new round of military clashes between the US and Iran, Brent crude jumped 9.9% in one day, with both sides issuing conflicting statements over whether the Strait of Hormuz remains unobstructed. Trump stated the US is "restoring" the blockade on Iranian vessels, further increasing market concerns over interruptions to global energy supply.
The sharp rebound in energy prices directly reinforced the market’s assessment that inflationary pressures will be hard to dissipate and, combined with Waller’s hawkish signals, prompted rapid repricing of short-term rate expectations.
CPI and Warsh’s Testimony Are Key Variables This Week
This week’s policy signals will be concentrated at two key points. The market expects June’s CPI year-over-year increase to slow to 3.8% from May’s 4.2%, but still well above the Fed’s 2% target; core CPI is also expected to ease slightly but remain elevated.
TD Securities US Rates Strategist Molly Brooks said:
"The market has raised near-term rate hike expectations, which is a direct response to Waller’s statement. This makes tomorrow’s CPI data even more crucial and increases volatility—if the data is hot, the risk of further bear flattening is on the table."
Meanwhile, Fed Chair Warsh will attend a Congressional hearing for the first time in his position this week. Warsh had previously pledged to reduce forward guidance on interest rate outlook, and the content of his testimony will be closely monitored by the market. Ian Lyngen, Head of US Rates Strategy at BMO Capital Markets, stated:
"Investors continue to focus on the July 29 FOMC meeting, viewing it as a possible window for Warsh’s first rate hike. The combination of Tuesday’s CPI data and Warsh’s testimony will significantly shift the odds of a rate hike in one direction."
Although the probability of a rate hike is close to 50%, most investors’ base expectation is still no hike this year.
WallstreetCN article also noted that Waller said that if a lower core inflation reading emerges, he would support staying on hold, but he also set conditions: "After inflation continued to rise in the first half of this year, I need to see several consecutive months of cooling data to confirm that inflation is moving in the right direction."
Additionally, Waller explicitly cited policy mistakes during pandemic inflation as cautionary tales, warning that the FOMC was widely criticized for not raising rates in time and that such mistakes must not be repeated. "FOMC must be ready to tighten monetary policy to prevent a repeat of the inflation situation in 2021-2022," he said.
Macro strategist Alyce Andres pointed out that Waller’s speech on Monday actually clarified the Fed’s reaction function, while delivering hawkish signals, also reduced the uncertainty premium on the market’s expected policy path.
Analysis suggests that this means this week’s data and testimony will largely determine whether the market needs to further reprice rate hike expectations.
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