#夏日创作营

About next week’s Fed rate hike—economists say “No,” but the market is going crazy betting on “Yes”—who is deceiving investors?

Next week’s highly anticipated Federal Reserve July policy meeting is about to arrive. After June’s CPI data unexpectedly cooled, markets had assumed that keeping rates unchanged in July was basically a sure thing. But this week, the situation turned abruptly. On Thursday during intraday trading, the yield on the 10-year U.S. Treasury broke through the 4.7% level in one swoop, surging to 4.71% and hitting the highest level since January 2025. The yield on the 30-year U.S. Treasury rose in tandem to 5.19%, just one step away from the highest level since 2007.

At the same time, Brent crude oil prices broke above $100 per barrel. The three major U.S. stock indexes all plunged: the Dow fell 0.97%, the S&P 500 dropped 1.21%, and the Nasdaq Composite plunged 2.15%.

Behind all of this, it points in the same direction—

A Fed rate hike next week is no longer out of the question.

I. Probability surges: from 10% to 38% in just seven days

A week ago, the market believed the probability of a Fed rate hike in July was only about 10%.

Now, interest rate swap contracts tied to the Fed’s policy meeting dates show that the market’s expected probability of a 25-basis-point hike at the July meeting has risen to 38%.

The CME’s “Fed Watch” tool shows that the probability of holding rates unchanged in July is 65.3%, while the probability of a 25-basis-point hike is 34.7%.

No matter which dataset you use, one-third of the rate-hike probability—on the eve of the policy meeting, markets still have such massive disagreement—is extremely rare.

Even more alarming are the expectations for September: the probability of the Fed holding rates unchanged by September has fallen sharply to 17.6%. The cumulative probability of a 25-basis-point hike is as high as 57%, and the probability of a 50-basis-point hike is 25.4%. CME data shows that the probability of a September hike has climbed to about 82%; a week ago it was still under 53%.

Hikes are shifting from a “low-probability event” into a “high-probability reality.”

II. Resonance of three forces, pushing the Fed to act

1. Oil prices “break $100,” and the inflation nightmare returns

The Iran-U.S. conflict has continued to escalate. International oil prices are running wild. As of July 23, WTI crude oil futures rose to $89.34 per barrel, and Brent crude oil futures were at $97.63 per barrel. Then Brent crude surged through the $100 mark in a single move.

GasBuddy analysts warned that U.S. gasoline retail prices in the coming weeks could further jump to $4.15 to $4.25 per gallon.

Energy prices’ transmission effect into core inflation may prolong the duration of high inflation. And the U.S. core PCE inflation rate is still far above the Fed’s 2% target.

Keith Lerner, Chief Investment Officer at Truist Advisory Services, said bluntly: “Oil prices are pulling interest rates higher.”

2. The job market is “hot”—there’s no excuse for economic weakness

U.S. Department of Labor data shows that in the week ending July 18, initial jobless claims fell to 187k, the lowest level since 1969.

FWDBONDS Chief Economist said that based on the latest data, signs of some overheating in the economic growth outlook have emerged.

The GDPNow tracking indicator from the Federal Reserve Bank of Atlanta shows that the growth rate of real final domestic demand is expected to be close to 3%. Business investment is accelerating, and the labor market remains stable.

With such strong fundamentals, what reason does the Fed still have to delay a rate hike?

3. “Hawkish ace in the hole” from Wos(s)/“Wausch”

Since taking office in May this year, Fed Chair Kevin Wos(s) has completely changed the game.

He has made his position clear: investors should stop relying on the central bank’s forward guidance. Every policy meeting going forward will be “live” and subject to change. This sharply contrasts with the “give advance notice” style under Powell.

Bianco Research President warned: “Losing the Fed’s forward guidance means you’ll frequently see probability distributions of 20%, 30%, 40% in the future.”

More importantly, Wos(s) himself, in testimony to Congress, emphasized the cost of delaying a rate hike. He warned that financial conditions could amplify the cyclical swings between economic booms and busts, and noted that the prior rate cuts totaling 75 basis points not only failed to sustain employment, but instead fueled inflation.

Macro strategist Michael Ball said directly: “Delaying a rate hike after such a hawkish testimony will weaken the Chair’s credibility.”

III. A “rift” between the market and economists

Interestingly, economists overwhelmingly believe that there will be no rate hike next week.

A Bloomberg survey of 76 economists shows that all respondents expect the Fed to keep the benchmark interest rate unchanged in the 3.5% to 3.75% range at the July 28–29 policy meeting.

However, the market is voting with real money.

RJ O’Brien Managing Director John Brady admitted: “I don’t think the Fed will raise rates next week, but the market tells me the outcome of this vote will be closer to what I expected than I originally thought.”

Citi offered another explanation: the 30% rate-hike probability priced into the market does not necessarily mean investors truly believe there is a one-in-three chance the Fed will hike. Instead, it includes an additional risk premium. Once the Fed hikes unexpectedly, the shock to the bond market would be far greater than if it stayed put—so investors are willing to price this “tail risk” in advance.

But regardless of the explanation, the conclusion is the same—

The risk of a rate hike has grown so large that the market has to guard against it.

IV. The alarm has already sounded—no one can stand aside

The surge in U.S. Treasury yields directly affects borrowing costs across the entire economy—from the interest rates on newly issued corporate bonds to the mortgage costs ordinary people pay. The average interest rate on long-term U.S. mortgages has climbed to the highest level in nearly 12 months.

U.S. stocks have already voted with their feet—three major indexes have collectively tumbled.

And the September rate hike has almost been fully priced by the market. Interest rate swap contracts also suggest that the Fed will raise rates at least twice before the end of March next year.

After the Fed Chair Wos(s) took office, he refused to provide forward guidance, significantly increasing uncertainty about the rate outlook. Until policy communication becomes clear, high interest rates and the risk premium phenomenon may persist.

A strategist summed up the most painful line: “The Fed meeting is only six days away. Investors shouldn’t rush to buy anything. Sometimes you should have patience.”

The alarm has sounded.

Next week, July 28–29—everyone’s eyes will be on the Federal Reserve.