Fed July FOMC Meeting Preview: Rate Hike or No Change?

TradingKey - On July 28-29, Eastern Time, the Federal Reserve will hold its seventh monetary policy meeting of 2026. While this should have been a routine event, Wall Street's attitude this time is noticeably different, and no one can predict the outcome in advance.

Since taking office, the new Federal Reserve Chair Kevin Warsh has completely abandoned the "forward guidance" practice that Jerome Powell had used for years. The June policy statement was significantly streamlined; he refused to answer whether interest rates would be raised at the ECB Forum in early July, and remained tight-lipped about the interest rate path during a congressional hearing in mid-July. Jeremy Schwartz, an economist at Nomura Securities, bluntly stated that "the situation has become subtle and elusive," and the market is currently shrouded in "lingering doubts."

Fed Rate-Hike Case: Inflation Exceeds Target for Five Straight Years

The camp advocating for rate hikes has a straightforward reason. The June dot plot shows that 9 out of 18 policymakers expect at least one rate hike by 2026, whereas three months ago, no one predicted a hike.

[June Dot Plot, Source: Federal Reserve Official SEP PDF Report]

Dallas Fed President Lorie Logan has publicly stated, "moderately raising interest rates will better help the Fed balance its employment and price goals." Cleveland Fed President Beth Hammack pointed out that energy and AI costs have pushed up inflation, forcing the Fed to consider rate hikes.

Former New York Fed President William Dudley wrote on July 20 that inflation has exceeded 2% for five consecutive years, and failure to act would erode the Fed's credibility; the cost of inflation persistently exceeding the target over the long term is higher than that of over-tightening. He believes that by this autumn, the pressure to raise rates will become fully apparent.

Goldman Sachs ( GS) data show that inflationary pressure is spreading from energy to areas such as healthcare and finance. Setting the 1990–2019 average to 0 and the 2022 peak to 10, the pressure index for categories with current inflation rates exceeding 3% has climbed to 6.

Where Is the Fed’s Confidence to Hold Steady? June CPI Provides Confidence

The camp within the Federal Reserve supporting keeping rates on hold is equally confident. The headline CPI for June, released on July 14, plunged 0.4% month-on-month, marking the first negative monthly growth since 2020; meanwhile, the monthly core CPI rate also unexpectedly flatlined, with both coming in below expectations. The PPI released the following day also fell 0.3% month-on-month, missing expectations across the board.

[June CPI Data, Source: U.S. Bureau of Labor Statistics]

New York Fed President Williams has publicly stated that he has seen multiple signs indicating that inflation has peaked. Morgan Stanley's chief U.S. economist Gapen predicts that the Fed will "hold steady for the entire year and only cut rates twice in 2027 after inflation recedes."

Barclays' chief U.S. economist Giannoni even predicted that "the Fed will maintain current interest rates all the way through the end of 2027." Goldman Sachs also believes that June's inflation data has "effectively ruled out" the possibility of a rate hike in July.

How Is the Market Now Pricing July Rate Hike Probabilities

According to the latest data from the CME "FedWatch" Tool, as of July 23-24, the market estimated a 65.3% probability that the Federal Reserve would keep current interest rates unchanged in July, and a 34.7% probability of a 25-basis-point rate hike. This rate hike probability has risen significantly from approximately 12% a week ago.

As of July 24, market expectations for the September meeting were even more aggressive. The probability of a rate hike of at least 25 basis points in September had risen to approximately 82%, with the probability of a cumulative 25-basis-point hike at 57%, a cumulative 50-basis-point hike at 25.4%, and the probability of keeping rates unchanged at just 17.6%.

Jeffrey Gundlach, CEO and Chief Investment Officer of DoubleLine Capital, pointed out that the continuous hawkish signals released by Federal Reserve Chairman Kevin Warsh since taking office have helped the Federal Reserve regain market trust, and this policy credibility itself "is equivalent to a tightening measure."

Bank of America predicts that Warsh may remain on hold until September, subsequently raising rates by 25 basis points each in September, October, and December, for a cumulative rate hike of 75 basis points for the year. The bank noted that Warsh leaned hawkish during the press conference following the June FOMC meeting, repeatedly emphasizing the necessity of restoring price stability and suggesting that monetary policy may not yet be restrictive enough.

In summary, the outcome of the July FOMC meeting is highly likely to be keeping interest rates unchanged. There are three reasons: first, June CPI and PPI cooled more than expected for consecutive months, providing the Federal Reserve with data support to "wait and see"; second, since taking office, Warsh has abandoned forward guidance and refused to make pre-commitments, leading most mainstream institutions to view keeping rates on hold in July as the baseline scenario; third, Bank of America predicts that Warsh may keep rates unchanged until September, meaning that September is the real focus of the market's debate.

On July 28-29, the FOMC meeting will announce its interest rate decision, followed by a press conference held by Warsh. Thereafter, the market will closely monitor subsequent inflation data to assess the policy direction for the September meeting.