31.5% rate-hike probability: a rare “hawk-dove tug-of-war”

On July 23, CME “FedWatch” data showed that the market assigns a 65.3% probability to the Federal Reserve keeping interest rates unchanged in July, while the probability of a 25 basis-point hike rose to 34.7%. Although “hold steady” remains the dominant expectation, rate-hike bets exceeding 30% are rare on the eve of the Federal Reserve’s policy meeting.

Where does the uncertainty in policy come from? The fundamental reason is that, after new Federal Reserve Chair Waller took office, he clearly stated that he would cancel forward guidance and no longer hint at the interest-rate path in advance. In the past, the market had grown accustomed to accurately forecasting the Federal Reserve’s moves weeks ahead; now this “certainty anchor” is gone. Analysts noted that canceling forward guidance means the market will increasingly see rate-hike or rate-cut probabilities of 20%, 30%, and even 40%.

Both bulls and bears have solid reasons. Doves argue that the U.S. June CPI fell month-on-month for the first time in six years, with clear signals that inflation is cooling; Morgan Stanley also expects the Federal Reserve to hold rates steady for the full year. Hawks, meanwhile, emphasize that inflation has been above the 2% target for five straight years, and that inflation is “spreading outward” from individual industries; an escalation in the Iran-Iraq conflict has driven a sharp surge in oil prices, further heating up inflation expectations. The yield on the 2-year U.S. Treasury has risen to above 4.30%, reaching a one-and-a-half-year high.

The 31.5% rate-hike probability itself is not a conclusion, but a mirror—it reflects a paradigm shift in the Federal Reserve’s policy framework from “predictable” to “unpredictable.” For the market, the bigger risk may not be the rate hike itself, but that it can no longer rely on the certainty of “what the Federal Reserve will do” to guide trading. In that sense, the suspense of the July meeting is only the beginning. #夏日创作营