Will the Fed raise interest rates in July? The probability increases to nearly 50%, changes in Hormuz rewrite the interest rate script
[Will the Fed raise interest rates in July? The probability has increased to nearly 50%. The changes in Hormuz have rewritten the interest rate script] Although futures market traders and forecast markets still expect that the Federal Reserve will continue to remain on hold at the July meeting with a high probability, judging from the latest developments, whether to raise interest rates at this month’s meeting has become extremely suspenseful.
Although futures market traders and prediction markets still expect the Fed to remain on hold at its July meeting with a high probability, judging from the latest developments, whether to raise interest rates at this month's meeting has become extremely suspenseful. On Monday, market expectations for the Federal Reserve to raise interest rates increased significantly. The Federal Reserve will announce its next interest rate decision on July 29. According to CME's "FedWatch" tool, traders currently believe that the probability of the Fed raising interest rates by 25 basis points on July 29 has risen to 46.5%, compared with only 34% on Sunday. On the prediction market platform Kalshi, traders' bets on the probability of a rate hike also rose to 36%, up from less than 20% on Sunday and less than 10% at the beginning of this month. Changes in Hormuz rewrite interest rate script The probability of an interest rate hike has increased due to U.S. President Trump's announcement to resume the blockade of Iranian ports and impose a 20% toll on all goods passing through the Strait of Hormuz. According to CCTV News, on July 13, local time, US President Trump posted on the social media platform "Real Social" that the Strait of Hormuz is currently open and will remain open regardless of Iran's participation or not. The United States will reimpose the "Iran Blockade," which would restrict entry and exit of the Strait of Hormuz only to Iranian ships or customers, leaving all other countries with fair and open access to the strait. He also said that the United States will charge a 20% fee for all goods transported through here, and relevant processes and deployment work will be started immediately. Affected by this news, international oil prices rose sharply by more than 9% on Monday, with Brent crude oil futures regaining $80 per barrel. In addition, the statement of Federal Reserve Governor Christopher Waller also pushed up the probability of interest rate hikes on the Kalshi platform. He said the Fed must not repeat the mistakes of 2021 and 2022, when it was slow to take action to raise interest rates during a period of rising inflation. However, he also added that the Fed should not overcorrect and raise interest rates too quickly. Although inflation data in June are expected to cool down, the probability of raising interest rates is still rising. The U.S. Bureau of Labor Statistics will release its June Consumer Price Index (CPI) report on Tuesday. Economists surveyed by Dow Jones expect the CPI to rise 3.8% year-on-year in June, down from 4.2% in May. But as the conflict in the Strait of Hormuz escalates, the outlook for U.S. inflation could become more complicated if oil prices rise again. Barclays said in a report released on Monday that current inflation concerns are no longer limited to energy prices. Ajay Rajadhyaksha, chairman of Barclays Global Research, said that the price increase caused by the oil price shock has not yet ended, and high energy prices have not effectively suppressed demand, further exacerbating inflationary pressure. He added that price increases caused by artificial intelligence (AI) are also further worsening the inflation outlook. These factors add up to a situation where the Fed may have to take an increasingly hawkish stance, Rajadhyaksha writes. "A data-reliant policy framework means the Fed must respond to actual data on inflation as well as forecasts. And in the coming months, these data will be hardly optimistic," he wrote. (