The Federal Reserve under the Watch era is too hard to predict! As the FOMC approaches, the market still can't determine next week's policy direction.

The Federal Reserve under the Watch era is too hard to predict! As the FOMC approaches, the market still can't determine next week's policy direction.

Just days remain before the next Federal Reserve policy meeting, yet the market's judgments about its policy direction remain sharply divided—a situation rarely seen in recent years. The new chair, Walsh, has completely abandoned the practice of forward guidance popularized by his predecessor, fundamentally reshaping the rules of informational game between traders and the Fed.

Interest rate swap markets show that traders currently estimate a roughly 30% probability that the Fed will raise rates by 25 basis points at the July 29 meeting, and about a 70% probability of leaving rates unchanged. Such large disagreement so close to the meeting date is highly unusual in recent years.

According to Bloomberg on Thursday, Jim Bianco, President and Macro Strategist of Bianco Research, said: “Without forward guidance, we will frequently see probability distributions of 20%, 30%, 40%. The market is transitioning to this new way of thinking.”

The direct impact of this uncertainty has already appeared in the bond market. For traders betting on Fed moves, guessing correctly brings bigger rewards, while guessing wrong risks larger losses. The interest rate swap market is now fully pricing in a 25 basis point increase in September, and implying more than two hikes before next March.

Walsh breaks precedent, forward guidance becomes history

Since taking office in May, Walsh has clearly stated he will abolish the Fed’s long-standing practice of signaling the path of interest rates to the market in advance. He believes forward guidance imposes unnecessary constraints on policymakers when economic conditions change.

This stance starkly contrasts with his predecessor Powell’s style. Under Powell’s leadership, officials typically delivered clear signals to the market through speeches or media channels before meetings. The last time the market faced similar uncertainty about a meeting outcome was back in September 2024—traders disagreed whether the Fed would cut rates by 25 or 50 basis points, and Powell ultimately chose the larger cut to support the weakening labor market.

Inflation pressures and geopolitical risks intertwine, rate hike expectations swing back and forth

Though Walsh refuses to provide forward guidance, he has made clear his strong vigilance toward inflation. Since the pandemic, U.S. inflation has persistently exceeded the Fed's 2% target, convincing the market that a rate hike this year is inevitable—the debate is only about timing.

Bond traders leaned toward holding rates steady last week—the U.S. Consumer Price Index in June recorded its first decline in six years, cooling rate hike expectations in the near term. However, renewed escalation in the U.S.-Iran conflict soon pushed up oil prices, and rate hike expectations bounced back.

Economists and traders show rare divergence in judgment

Notably, economists are far more certain about next week's meeting outcome than traders. According to a Bloomberg survey of 76 economists, all respondents expect the Fed to hold the benchmark rate unchanged in the 3.5% to 3.75% range during the July 28-29 meeting.

Trader disagreements are much more pronounced. John Brady, Managing Director at RJ O'Brien, said: “I still don’t think the Fed will raise rates next week, but the market tells me this vote will be closer than I expect.”

This rare divergence between economists and the market is itself a microcosm of the market landscape change stemming from Walsh’s new style—in the absence of forward guidance, the noise in price signals will be significantly amplified, and uncertainty may become the new normal.

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