After Walsh Takes Over the Fed, Policy Uncertainty Increases; Market Highly Divided on Whether Rates Will Be Raised in July

According to Zhitong Finance APP, as the Federal Reserve's July FOMC meeting approaches, uncertainty regarding the Fed's policy path has risen significantly under the leadership of new Chair Walsh. With only a few days left before the meeting, there is still considerable disagreement in the market over whether the Fed will raise rates this month—something that has been rare in recent years.

Interest rate swaps market shows that traders currently assign about a 30% probability that the Fed will announce a 25 basis point rate hike on July 29, and about a 70% chance that rates will remain unchanged.

Market participants believe that such a clear divergence of expectations on the eve of a policy meeting could become the new normal during the Walsh era.

Jim Bianco, President and Macro Strategist at Bianco Research, said that the elimination of forward guidance means the market will frequently see 20%, 30%, or even 40% probabilities of a rate hike or cut in the future. This reflects that investors are adapting to the Fed's new communication style.

The last time there was such a large disagreement in the market regarding the outcome of a Fed meeting was in September 2024. At that time, investors argued over whether the Fed would cut rates by 25 or 50 basis points; then Chair Powell ultimately opted for a 50 basis point cut to address the weakness in the U.S. labor market.

Since becoming Chair of the Federal Reserve in May this year, Walsh has repeatedly stated his intention to eliminate the long-standing practice of signaling the Fed's rate path in advance through forward guidance. He believes that, in a rapidly changing economic environment, releasing policy signals ahead of time could limit the flexibility of decision-makers.

For financial markets, this means that the risks and rewards of betting on the Fed's policy direction will both increase—investors who judge correctly can expect higher returns, while those who are wrong will face larger losses.

However, Walsh has consistently emphasized that U.S. inflation has remained above the Fed's 2% target since the COVID-19 pandemic. Therefore, the market generally expects the Fed to resume rate hikes this year, with the greatest suspense currently being the timing of such action.

Compared to traders, economists are more unified in their views. A survey shows that all 76 economists polled expect the Fed to keep the federal funds rate target range unchanged at 3.5%-3.75% at the July 28-29 meeting.

In fact, data released last week showed that the U.S. Consumer Price Index (CPI) in June posted its first month-on-month decline in six years, which once prompted the bond market to bet that the Fed would stay on hold.

However, with recent escalation of tensions between the U.S. and Iran and renewed increases in international oil prices, market concerns over rising inflationary pressures have resurfaced, strengthening expectations for a rate hike.

Currently, the interest rate swaps market is fully pricing in a 25 basis point Fed rate hike in September, and expects total rate hikes to exceed 50 basis points by March next year—meaning the market anticipates more than two additional hikes in the future.

John Brady, Managing Director at RJ O'Brien, said he personally still believes the Fed will not hike rates next week, but market pricing indicates this meeting’s policy decision is much closer than he previously expected, and the outcome remains uncertain.