Will the Fed Hike Rates This Week? Market Expectations Polarized as Warsh Abandons Forward Guidance, Fueling Uncertainty

With just days remaining until the Federal Reserve's (Fed) decision on Wednesday (29th), market views on whether a rate hike will occur are showing a rare and significant divergence. The main catalysts are Brent crude oil prices surpassing $100 per barrel for the first time last week and the policy uncertainty stemming from new Chair Kevin Warsh's abandonment of the long-standing practice of forward guidance.

According to pricing in CME Group's federal funds futures, the market currently assigns approximately a 38% probability to the Fed raising rates by 25 basis points next week—up sharply from just 13% previously.

Meanwhile, interest rate swap markets reflect a roughly 30% chance of a rate hike, with about a 70% probability of rates being held steady. Analysts note that such a large divergence so close to a decision date is highly unusual in recent years.

The key trigger for this shift in expectations was Brent crude oil briefly breaking above $100 per barrel on Thursday (23rd), marking its highest level since May and representing a cumulative increase of about 25% since the June Fed meeting. Rising geopolitical tensions have driven oil prices higher, pushing up gasoline and diesel prices and placing cost pressures on both consumers and businesses.

Mark Cabana, Head of U.S. Rates Strategy at Bank of America, said the outcome of this meeting is "completely unpredictable." There is already debate over whether current monetary policy remains restrictive, and rising oil prices have further complicated the situation.

Robert Sockin, Chief U.S. Economist at PGIM, described next week’s meeting as having odds that are "almost 50-50."

Beyond oil prices, another source of market volatility lies in Warsh’s markedly different communication style compared to former Chair Powell. Since taking office in May, Warsh has clearly stated his intention to abandon the Fed’s long-standing practice of pre-announcing interest rate trajectories, arguing that forward guidance can tie policymakers’ hands when economic conditions shift.

Warsh recently emphasized during congressional testimony that he would maintain "zero tolerance" for high inflation but offered almost no clues about future policy direction.

Jim Bianco, President of Bianco Research, noted that the absence of forward guidance means markets will increasingly see probability distributions scattered across 20%, 30%, and 40%. Investors are adapting to this new pricing logic.

Agha Mirza, Head of Interest Rate Products at CME Group, also pointed out that trading volume in federal funds futures ahead of this meeting is 50% higher than at the same point last year, reflecting significantly increased debate over the accuracy of rate hike probabilities.

Hawkish voices grow louder, but economists still favor holding steady

At the same time, hawkish sentiment within the Fed is gradually gaining ground. Lorie Logan, President of the Dallas Fed, and Beth Hammack, President of the Cleveland Fed, have both publicly stated that the Fed has delayed too long in fighting inflation, continuing to burden American households and businesses.

Neel Kashkari, President of the Minneapolis Fed, is also reportedly considering supporting a rate hike, even though most officials still lean toward holding rates steady.

However, influential figures like John Williams, President of the New York Fed, favor waiting until September to make a decision, allowing more time to assess inflation data.

June’s Consumer Price Index (CPI) rose 3.5% year-on-year, below market expectations, supporting the case for a wait-and-see approach. Joe Lavorgna, Chief U.S. Economist at SMBC Nikko Securities, countered, asking why the Fed should wait until September if conditions are already in place.

Despite the clear warming in market pricing for a rate hike, the majority of professional economists still expect the Fed to hold steady next week.

According to Bloomberg’s latest survey of 76 economists, all respondents anticipate that the Fed will maintain its benchmark interest rate range at 3.5% to 3.75% during its July 28–29 meeting.

Claudia Sahm, former Fed official and current Chief Economist at New Century Advisors, said officials will carefully weigh the pros and cons of a rate hike, but based on current public statements, those supporting an immediate hike remain in the minority.

Analysts widely believe the rare gap between economist forecasts and market pricing reflects a broader shift in market dynamics driven by Warsh’s new communication approach. In an era without forward guidance, price signal noise is likely to increase significantly, and uncertainty may become the new normal for Fed decision-making.