Expectations for the Federal Reserve to raise interest rates in July have increased significantly, and geopolitical conflicts have triggered inflation concerns
Affected by factors such as the worsening geopolitical situation between the United States and Iran and the sharp rise in international oil prices, market expectations for the Federal Reserve to raise interest rates in late July have increased significantly in recent days, triggering widespread concern about the outlook for U.S. inflation and the direction of monetary policy. The latest data from the Chicago Mercantile Exchange's (CME) "FedWatch" tool (FedWatch) shows that the probability of the Federal Reserve raising interest rates by 25 basis points at the July 29 policy meeting has risen to 46.5%, a significant increase from 34% the previous day. Data from the prediction market platform Kalshi also shows that traders expect the probability of the Federal Reserve to raise interest rates in July has risen sharply to 36% from less than 10% at the beginning of this month. Although most analysts still expect the Fed to keep interest rates unchanged, nearly half are in favor of raising interest rates. The surge in energy prices caused by geopolitical conflicts is a direct cause of the upward trend in interest rate expectations. After U.S. President Trump announced that he would reimpose a maritime blockade on Iran and plan to impose transit fees, international crude oil prices rose sharply, and the price of West Texas Intermediate crude oil (WTI) futures on the New York Mercantile Exchange returned to above US$75 per barrel. The market is concerned that if the conflict in the Strait of Hormuz continues to cause high oil prices, it will severely undermine U.S. efforts to control inflation. In addition, the stance of policymakers within the Federal Reserve also exacerbated market panic. Federal Reserve Governor Christopher Waller recently publicly stated that the Federal Reserve must learn from the historical lessons of 2021 and 2022 and avoid raising interest rates too late when inflation rises, although he also emphasized that policy adjustments should not be excessive. Currently, the market is paying close attention to the upcoming US Consumer Price Index (CPI) for June. Although economists had predicted that inflation would fall slightly to 3.8% in June from 4.2% in May, the latest fluctuations in energy prices have made this outlook uncertain. Ajay Rajaadhyaksha, chairman of global research at Barclays Bank, pointed out in the latest report that the price transmission effect caused by the oil price shock has not yet ended. High energy prices have not suppressed market demand as expected, coupled with price increases driven by emerging fields such as artificial intelligence, all leading to further deterioration of the inflation outlook. He emphasized that the Fed's data-based decision-making model means that it must respond to future inflation data, and the economic data in the next few months are not optimistic, and the Fed's policy stance may change to a more hawkish direction.