Fed rate hike probability surges; oil prices break $100, sparking inflation worries

Written by: Dong Jing

Only a few days remain until the Federal Reserve’s July 29 policy meeting, yet market views on its policy direction are highly divided—a situation that is extremely rare in recent years. Soaring oil prices, persistent inflation pressure, and, on top of that, new Fed Chair Warthch has completely abandoned the forward guidance approach previously used by his predecessor, forcing investors to take seriously the possibility of a rate hike next week.

According to CME Group federal funds futures data, the market currently prices a roughly 38% probability of a 25-basis-point rate hike by the Fed next week, up sharply from 13% a week earlier. Meanwhile, the interest rate swap market shows a 30% probability of a rate hike and a 70% probability of keeping rates unchanged. With the meeting date so close, such a large split in expectations remains extremely rare in recent years.

The direct trigger for this shift is that Brent crude price broke above $100 per barrel for the first time during intraday trading on Thursday; since the June Fed meeting, the cumulative increase has reached 25%. In addition, the new Fed chair, Warthch, has previously made it clear that “no guidance will be provided.”

Analysts believe that Warthch’s hawkish remarks combined with the oil-price shock has sharply heightened market concerns about the inflation outlook. The Fed’s preferred PCE inflation measure shows a May reading of 4.1%, more than twice its 2% target. Some economists and investors warn that if the market pricing for rate hikes rises further, it could in turn pressure the Fed into taking action.

Oil-price shock reignites expectations of rate hikes

Brent crude broke above $100 per barrel during intraday trading on Thursday—the first time since May this year—directly triggering fresh concerns in the market about inflation rising again.

As the escalation of geopolitical tensions has pushed oil prices higher and higher, gasoline and diesel prices have climbed noticeably in recent weeks, putting pressure on both consumers and U.S. industry costs.

Mark Cabana, head of U.S. rates strategy at Bank of America, said:

"The July Fed meeting is absolutely 'live.' Whether current monetary policy is restrictive in itself is a big question. And oil prices are now rising again."

Robert Sockin, chief U.S. economist at PGIM, described next week’s meeting as "almost a coin flip."

Warthch’s “no guidance” makes market pricing significantly harder

Another important source of market uncertainty is Warthch’s communication style, which is starkly different from former Chair Powell’s.

Since taking office in May, Warthch has clearly stated that he will do away with the Fed’s long-standing practice of sending interest-rate path signals to the market in advance, arguing that forward guidance would unnecessarily constrain policymakers when economic conditions change.

Earlier this month, Warthch said in a congressional testimony that he has “zero tolerance” for persistently high inflation, but he provided almost no clues about the policy path.

A Wall Street Journal article previously wrote that Jim Bianco, president and macro strategist of Bianco Research, said:

"Without forward guidance, it means we will frequently see probability distributions of 20%, 30%, 40%. The market is transitioning to this new way of thinking."

Agha Mirza, global head of rates and OTC products at CME Group, noted that trading volume in federal funds futures before this meeting was 50% higher than in the July 2025 decision, saying that this unusual level of activity “stems from the growing discussion of whether the market’s pricing of the probability of a rate hike is accurate, behind which is Warthch’s heightened vigilance over inflation.”

Hawkish voices build up in the FOMC; economists lean toward holding steady

At the same time, hawkish forces inside the Fed are taking shape at a certain scale.

Dallas Fed Chair Lorie Logan and Cleveland Fed Chair Beth Hammack have both publicly said that the Fed has waited too long to address inflation, a problem that continues to trouble households and businesses in the United States.

Minneapolis Fed Chair Neel Kashkari may also support a rate hike, even if most members choose to hold off.

Sockin of PGIM said:

"The hawkish sentiment within the Fed is reaching a certain critical mass."

However, influential voices within the FOMC such as New York Fed Chair John Williams tend to lean toward waiting until September to make a decision, in order to observe the inflation trend with more time. June CPI data showed inflation at 3.5%, below expectations, providing support for the side that argues for waiting.

Joe Lavorgna, chief U.S. economist at SMBC Nikko Securities America and an economic adviser to former U.S. Treasury Secretary Scott Bessent, asked directly: “If you can raise rates now, why wait until September?”

He also suggested that Warthch could explain to Trump that aggressively fighting inflation now would actually help lower long-term borrowing costs—“a win-win.”

Despite the warming rate-hike expectations, most economists still lean toward the Fed keeping rates unchanged next week. A Wall Street Journal article said that, according to a Bloomberg survey of 76 economists, all respondents expected the Fed to keep the benchmark interest rate unchanged in the 3.5% to 3.75% range at the meeting on July 28 to 29.

Claudia Sahm, former Fed official and now chief economist at New Century Advisors, said:

"They will seriously discuss the pros and cons of a rate hike, but based on the statements by the Fed officials, I don’t see a majority supporting a rate hike right now."

Clocktower Group’s Eric Wallerstein also believes that, "This is not the time for 'deterrence action,' because there is nothing in the underlying data that can justify an unexpected rate hike."

RJ O’Brien managing director John Brady said:

"I still don’t think the Fed will raise rates next week, but the market tells me that the result of this vote will be closer to what I expected."

Analysts believe that this rare divergence between economists and the market is itself a microcosm of the market ecosystem changes brought about by Warthch’s new style—when forward guidance is absent, the noise in price signals will be significantly amplified, and uncertainty may become the new normal.