This week’s FOMC meeting is highly unpredictable as Chairman Kevin Warsh hasn’t revealed whether he favours a rate hike. Officials face sharply conflicting signals on growth and inflation. The Fed was evenly divided on further rate hikes at its last meeting. Warsh could tip the balance. In a no-guidance regime, the headline decision could remain unchanged while the meeting’s information content changes considerably. The signal may be in how many voters refuse to support the decision. Currently, the benchmark federal funds rate sits in a range of 3.50% to 3.75%.
According to the CME FedWatch tool, traders assign a 62% probability that the Fed will hold rates at this meeting. That has decreased since the start of the previous week, when markets assigned an 84% chance of a rate hold. Renewed Middle East tensions involving Iran have pushed oil prices higher, strengthening the case for a rate increase in 2026 to guard against more persistent inflation. At the same time, June inflation data came in softer than expected, and the labour market doesn’t show signs of overheating, supporting arguments to leave rates unchanged. The current economic data have been more favourable than what the Fed had in front of them in June. It would be strange for the Fed to respond to that set of data by hiking at the July meeting when it chose not to in June.
Warsh has repeatedly stressed over the past two months that the Fed must restore price stability and convince markets it has not accepted permanently higher inflation. However, he has not explained why current interest rates are sufficient to achieve that. Fed officials favouring another rate hike remain vocal, while some who currently support holding rates have indicated they could back tighter policy later this year. As a result, keeping rates unchanged may simply delay the debate until September.
Markets expect higher Fed rates by year-end, but disagree on how far tightening will go. Prediction markets largely expect one or two rate hikes, while SOFR options assign much higher odds to a more aggressive cycle. This suggests investors are increasingly hedging against the risk that the Fed may need to tighten more than expected. With less Fed guidance, markets are increasingly pricing their own policy path, though views remain widely divided.
