During the Warsh era, the Fed's movements are more difficult to predict, and traders are clearly divided on whether to raise interest rates next week
The Federal Reserve under Kevin Warsh has begun to leave a distinct mark on financial markets. With just days left until the next rate meeting, traders remain sharply divided over whether the central bank will raise interest rates. The interest rate swap market shows that traders believe that the probability of the Fed raising interest rates by 25 basis points next week is about 30%, and the probability of keeping unchanged is about 70%. It's rare in recent years for such deep divisions to remain so close to a meeting, but it may become more common under Warsh. As the new chairman, Warsh broke with his predecessor's tradition of hinting at the central bank's next move. Jim Bianco, president and macro strategist at Bianco Research, said: "The lack of forward guidance means that we will often see 20%, 30%, 40% probabilities in the future. The market is shifting to this new way of thinking." The last time the market had such big doubts about the outcome of the Fed meeting was in September 2024. At the time, traders were divided over whether the Fed would cut interest rates by 25 basis points or 50 basis points. Then-Fed Chairman Jerome Powell ultimately chose to cut interest rates by 50 basis points to support the weakening labor market. Warsh has pledged since taking office in May to do away with the Fed's long-standing practice of signaling the direction of interest rates. He believes that as economic conditions change, such forward guidance may impose unnecessary constraints on policymakers. For traders, this significantly increases the risk and reward of betting, with those who correctly judge the Fed's actions likely to gain more, while those who judge incorrectly will also face greater losses. However, Warsh has made clear that he believes it is necessary to curb inflation, which has been above the Fed's target since the outbreak. This has traders convinced that the Fed will raise interest rates before the end of the year, the only question is when. Economists are more certain than traders about the outcome of next week's meeting. All 76 economists surveyed by Bloomberg expect the Fed to keep interest rates unchanged in a range of 3.5% to 3.75% at its July 28-29 meeting. Bond traders also swung to that view last week when data showed U.S. consumer prices fell in June for the first time in six years. But since then, the conflict between the United States and Iran has escalated again, pushing oil prices back up and gradually pushing up market expectations for interest rate hikes. The interest rate swap market has now fully priced in the Fed's expectation of a 25 basis point interest rate hike by the end of September, and shows that the cumulative number of interest rate hikes will exceed two by the end of March next year. “I still don’t think the Fed will raise interest rates next week, but the signal from the market is that this vote may be closer than I expected,” said John Brady, managing director at RJ O’Brien. Open a futures account on Sina's cooperative platform, safe, fast and guaranteed