Federal Reserve July Interest Rate Decision Preview: 25.7% Probability of a Rate Hike, How Will the Market Reprice Risk Assets?

CME "FedWatch" data as of July 7, 2026 shows that the probability of the Federal Reserve maintaining the current interest rate at the July FOMC meeting is 74.3%, while the probability of a cumulative 25-basis-point hike is 25.7%. This probability distribution indicates that the market has largely ruled out a July rate hike from its baseline scenario.

More noteworthy is the probability matrix for September: the probability of maintaining the current rate is 42.9%, the probability of a cumulative 25-basis-point hike is 46.2%, and the probability of a cumulative 50-basis-point hike is 10.8%. This means the market sees the September meeting as a key turning point in the interest rate path for the second half of 2026—the probabilities of a hike versus holding steady are nearly equal, with divergence reaching an extreme.

The CME FedWatch tool calculates the market's probability distribution of FOMC meeting rate outcomes based on 30-day federal fund futures prices. This tool effectively captures the market's ongoing digestion of the latest economic data and is one of the core indicators for observing changes in monetary policy expectations.

How Nonfarm Data Rewrote the Probability of a July Rate Hike

The June nonfarm payrolls report released on July 2 was the direct catalyst for the recent shift in rate expectations. The report showed only 57k new jobs added, far below the market expectation of 110k to 114k; April and May data were revised down by a combined 74k. Before the data release, the market's probability of a July rate hike was around 30%, which plummeted to under 20% afterward.

The deeper significance of this report lies in the overlap of three signals: the trend slowdown in employment growth, the weakness in employment masked by the labor force participation rate falling to a five-year low, and the collective validation of leading indicators such as ADP employment and initial jobless claims. Essentially, the nonfarm data served as a "data correction" to the true state of the labor market—the previously established narrative of "economic resilience" built on overestimated data was reexamined.

However, the unemployment rate fell from 4.3% in May to 4.2%, confirming that the job market still has some resilience. This gives the Fed more policy room on the "employment" mandate dimension, allowing it to shift more attention to the inflation dimension.

Waller Warns of Inflation Risk Reversal: Policy Focus Forced to Adjust

Federal Reserve Governor Christopher Waller sent a clear signal while attending the Italian central bank's monetary policy conference in Rome: given that the U.S. labor market has stabilized, high inflation is replacing weak employment as the primary risk facing the U.S. economy.

Waller noted that a year ago he had advocated for rate cuts due to poor labor market conditions and was willing to tolerate a longer timeline for inflation to return to target. However, the current situation has undergone a fundamental reversal—"The labor market has stabilized, while inflation is accelerating," forcing the Fed to reassess its existing policy stance. Waller explicitly stated: "The risks have completely reversed. That will change how you think about monetary policy."

Although global oil prices have fallen back to around $70 per barrel, roughly returning to pre-military strike levels by the U.S. and Israel against Iran, which helps alleviate overall price pressures, Fed policymakers' projections released after the June meeting still show that their preferred inflation gauge will be more than one percentage point above the 2% target by year-end. Tim Duy, chief U.S. economist at independent research firm SGH Macro Advisors, pointed out that against the backdrop of relatively low unemployment and inflation persistently above target, nine Fed officials already expect tightening to be necessary this year.

Internal Divisions at the Fed: The Debate Over Forward Guidance

Beyond policy direction, internal debate at the Fed over communication tools is also intensifying. In his speech, Waller strongly defended the value of forward guidance, arguing that when used appropriately, it significantly enhances the effectiveness of monetary policy. He cited the example of fall 2021, when the Fed, despite not formally raising rates, successfully drove a steady rise in interest rates by guiding market expectations.

However, Waller also emphasized the importance of flexible use. He warned that if used too rigidly, forward guidance could become a policy obstacle. Citing lessons from 2020 to 2021, he noted that the Fed's rigid commitment to maintaining low rates while inflation was rapidly heating up—until it was forced to hike in March 2022—exposed the drawbacks of over-guidance. "Forward guidance is more of an art than a science," Waller said. "If it's not flexible, it can hinder policy transmission, and in some cases, it's best not to use it at all."

This stance creates a subtle divergence with new Fed Chair Kevin Warsh. At the June FOMC meeting, Warsh clearly stated that the Fed would no longer provide interest rate forward guidance, instead relying entirely on the latest economic data to make meeting-by-meeting decisions. This divergence fundamentally reflects the deep tension within the Fed between "rule-based" and "data-dependent" policy philosophies.

Dot Plot Sends Hawkish Signals: Uncertainty in the 2026 Rate Path

The dot plot released at the June FOMC meeting sent a strong hawkish signal. The median federal funds rate forecast shifted upward across the board: the median rate for end-2026 was raised from 3.4% in March to 3.8%, removing the previously implied one rate cut. Among the 18 officials providing rate forecasts, as many as nine expect at least one rate hike within 2026, with five expecting two hikes and one expecting three hikes.

This distribution means that the Fed's internal judgment on the rate path is almost evenly split—nine officials support a hike, while nine expect no change or a cut. The change in the dot plot has drawn significant market attention because it represents a fundamental shift from expectations in March, when no one supported a rate hike this year.

For the market, the hawkish upward revision to the dot plot means the risk of rates staying "higher for longer" is being repriced. The current federal funds rate target range is maintained at 3.5% to 3.75%. If a September rate hike materializes, it would be the first hike since the start of the 2025 rate-cutting cycle, marking a substantial turning point in monetary policy direction.

How Rate Hike Expectations Affect Crypto Markets and Risk Asset Pricing

The impact of changes in rate expectations on crypto markets is transmitted mainly through two channels: the discounting effect of risk-free rate changes on risk asset valuation models, and the impact of changes in market liquidity expectations on risk appetite for speculative assets.

When the market expects a higher probability of rate hikes, a rise in risk-free rates depresses the present value of risk assets. As high-volatility, high-duration risk assets, crypto assets are particularly sensitive to interest rate changes. Conversely, when the probability of rate hikes decreases, risk assets receive valuation support.

The current 74.3% probability of no change means a July rate hike is not yet an imminent threat. But the probability of a September rate hike rising to 46.2%, close to a coin flip, indicates that market pricing for a rate hike this year has not completely disappeared but has been delayed to the third quarter. Polymarket data shows that the probability of no rate hike in July is as high as 89.5%, indicating that prediction markets are pricing a more dovish outcome than the CME tool. This discrepancy itself reflects the high level of uncertainty in current market expectations.

For crypto market participants, the June CPI data to be released on July 14 will be a key factor in determining whether the July meeting and subsequent meetings will involve rate hikes. This is the last key inflation data point before the Fed meeting on July 28-29. If CPI data shows inflation running above expectations, the probability of a July rate hike may rise again; if inflation data is mild, the market will further consolidate expectations of no action in July and reassess the probability distribution for a September rate hike.

From Rate Expectations to Asset Allocation: How Macro Narratives Affect Trading Logic

Changes in rate expectations not only affect the short-term price movements of crypto assets but also profoundly impact investors' asset allocation logic. In an environment of rising rate hike expectations, investors tend to reduce risk exposure and increase cash or short-duration asset allocations; when rate hike expectations cool, risk appetite recovers, often driving capital into high-beta assets.

The core contradiction in the current market is that the Fed's policy framework is shifting from "forward guidance-driven" to "data-dependent." This shift itself increases policy path uncertainty—the market can no longer rely on the Fed's clear guidance to anticipate rate direction but must interpret each piece of economic data on its own. This uncertainty is itself an important variable in risk asset pricing.

For investors allocating to both crypto assets and traditional financial assets, changes in rate expectations provide a cross-asset linkage analysis framework. Gate has launched real U.S. stock trading, allowing users to trade U.S. stocks, Hong Kong stocks, Korean stocks, and ETFs directly using USDT, without needing to open a separate traditional brokerage account or manually exchange USD. This means investors can adjust their allocations between crypto assets and U.S. stocks within the same platform, responding more flexibly to macro expectation changes.

Summary

CME "FedWatch" data shows that the probability of the Federal Reserve maintaining the current rate in July is 74.3%, and the probability of a 25-basis-point hike is 25.7%. This probability distribution is the result of market repricing after the June nonfarm payrolls data fell far short of expectations. Fed Governor Waller warned that inflation risk has overtaken employment risk, forcing the policy focus to tilt toward inflation, while internal debate over the survival of forward guidance is significant. The June dot plot shows that nine officials support a rate hike this year, with uncertainty about the rate path at a multi-year high. The June CPI data on July 14 will be a key variable for judging the subsequent policy direction. Under the new data-dependent policy framework, every marginal change in rate expectations will have a transmission effect on the pricing of crypto assets and risk assets like U.S. stocks.

FAQ

Q1: How is the 74.3% probability from the CME "FedWatch" calculated?

The CME "FedWatch" tool calculates the market's probability distribution of FOMC meeting rate outcomes based on 30-day federal fund futures prices. This tool reflects market participants' collective expectations of rate direction in real time and is one of the core indicators for observing changes in monetary policy expectations.

Q2: What does it mean for the crypto market if the Fed does not hike in July?

No action in July means a rate hike is not an imminent threat, which is short-term positive for risk asset valuation stability. However, the market has already postponed rate hike expectations to September—the probability of a cumulative 25-basis-point hike in September is 46.2%. Therefore, no hike in July merely "delays" rather than "cancels" a rate hike, with the impact on the crypto market being more of a short-term sentiment boost rather than a trend reversal.

Q3: What exactly does Waller mean by "inflation risk reversal"?

Waller noted that a year ago, the Fed's main concern was weak employment, leading to a preference for rate cuts and tolerance for a longer timeline for inflation to return to target. But now the labor market has stabilized while inflation is accelerating. Policy risk has completely shifted from "employment downside" to "inflation upside," changing how monetary policy is thought about.

Q4: Why is the June CPI data so important?

The June CPI data will be released on July 14 and is the last key inflation data point before the Fed meeting on July 28-29. If inflation exceeds expectations, the probability of a July rate hike may rise again; if inflation is mild, the market will further consolidate expectations of no action. This data will directly affect the Fed's policy decision in July and the market's pricing of the probability of a September rate hike.

Q5: What is the impact of the Fed abandoning forward guidance on the market?

Fed Chair Warsh has clearly stated that the Fed will no longer provide interest rate forward guidance, instead relying entirely on the latest economic data for meeting-by-meeting decisions. This means the market can no longer rely on clear Fed guidance to anticipate rate direction and must interpret each piece of economic data on its own. The rise in policy uncertainty itself increases volatility in risk assets, requiring investors to pay more attention to the release rhythm of economic data and the gap between data and market expectations.

Q6: How can Gate users respond to market volatility caused by changes in rate expectations?

Gate has launched real U.S. stock trading, allowing users to trade U.S. stocks, Hong Kong stocks, Korean stocks, and ETFs directly using USDT. Users can adjust their allocations between crypto assets and U.S. stocks within the same platform, flexibly adjusting risk exposure based on macro expectation changes, achieving dynamic cross-asset allocation.