The Federal Reserve's July 28-29 policy meeting has shifted from a near-certain hold into an open question. CME Group FedWatch data as of July 24 put a 35.8% probability on a quarter-point hike, against 64.2% for no change. Renewed energy-price pressure, new tariffs and a resilient labor market moved the bets.
Financial markets price a 35.8% chance of a quarter-point Federal Reserve rate hike at the July 28-29 policymaking meeting, against a 64.2% probability that the benchmark holds, according to the CME Group FedWatch Tool as of July 24. A week earlier the same tool showed a near 90% chance that July rates would remain steady. Economists, traders and other Fed watchers had forecast a hold, pointing to a stabilizing labor market, a huge slide in oil prices and a dip in the June Consumer Price Index.
Iran escalation and new tariffs reset the picture
However, military escalation in the Iran war sent energy prices surging again amid concerns that the so-called peace accord between the United States and Iran had broken down, lifting pump prices across the country while Treasury yields hit new highs. The Trump administration on July 24 released new tariffs of between 10% and 12.5% against 60 countries for alleged forced labor practices, a workaround from the Supreme Court ruling earlier this year squashing the "Liberation Day" tariffs.
Eric Diton, president of The Wealth Alliance, told TheStreet the Fed's 2% inflation target seems unattainable in the near-term, citing the dragging Iran war, spiking oil prices, a resilient labor market, a shortage of resources due to the AI buildout and tariff uncertainty. He put the 30-year Treasury rate at around 5.18%, the highest in nearly two decades, and said markets now give a 30-40% probability the Fed will need to hike at least once before year-end.
Fed officials split on inflation risk
The FOMC voted unanimously in June to hold its benchmark target in a range of 3.5% to 3.75%, yet the minutes of that meeting showed officials splitting their views on inflation risk with a rising hawkish tinge to the dot plot. Lower rates support hiring but can fuel inflation. Higher rates cool prices but can weaken the job market and raise borrowing costs.
Fed Governor Christopher Waller said in a July 13 speech that inflation is up this year and that he is concerned about the elevated pace of core inflation. William English, a former senior Fed economist now at Yale University, told The Wall Street Journal: "I can make a good case for either raising rates or not".
Bets build for hikes later in the year
Beyond July, traders price a nearly 79% cumulative chance of at least one 25 basis-point hike by or during the September FOMC meeting. By year-end the FedWatch Tool leans heavily toward a half-point hike, reflecting sustained inflation concerns. Former New York Fed President Bill Dudley wrote in Bloomberg Opinion that the Fed's credibility is at risk and recommended tightening policy, noting that inflation has exceeded the central bank's 2% objective for more than five years.
Source: TheStreet
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