Will the Federal Reserve Really Raise Rates This Week? The Market Isn't Buying the July Decision

TL;DR · Before the July meeting, interest rate futures briefly priced in over a 30% chance of a rate hike. · The divergence lies in whether oil prices, employment, and inflation stickiness will force the Fed to abandon its rate cut narrative. · Related assets: USD, US Treasuries, gold, Bitcoin, Nasdaq, Brent crude oil, WTI.

The Federal Reserve will hold a monetary policy meeting from July 28 to 29, and before the meeting, the interest rate futures market pushed the probability of a 25 basis point rate hike in July to over 30%.

This pricing is inconsistent with most macro forecasts. The June FOMC clearly stated that the target range for the federal funds rate would remain at 3.50%-3.75%. According to Bloomberg reports and market surveys, most economists still lean towards keeping rates unchanged in July.

Ordinary investors need to clarify one point: CME FedWatch is not a central bank forecast, but a policy probability derived from futures prices. According to Kiplinger’s July 24 citation of CME FedWatch, the probability of keeping rates unchanged was 64.2%, with an implied rate hike pricing of about 35%. Different platforms may fluctuate in real-time.

Therefore, what we should really watch this week is not whether "rates will be raised in July," but whether the market is abandoning the most comfortable assumption of the past few months: that inflation will continue to decline and that rate cuts are just a matter of time.

Rate Path Repriced

The market pricing in a rate hike indicates that the safety net for rate cut trades has thinned. For risk assets, a single 25 basis point hike is not the whole issue; maintaining higher rates for a longer period will change valuation anchors.

If the Fed simply keeps rates unchanged but the statement and the chair's press conference clearly emphasize inflation risks, energy prices, and labor market tightness, the market will interpret this as a hawkish signal. For the USD, US Treasuries, gold, and Bitcoin, directional guidance is sometimes more important than the actual rate action.

Long-term bond yields have already come under pressure. The Fed's H.15 data shows that the yield on 30-year US Treasuries has recently been around 5.06%-5.17%, with a yield of 5.17% on July 24, sitting at a high range not seen since 2007. Rising long-term bond yields indicate that the market demands higher compensation.

This will compress the pricing space for overvalued assets. Growth stocks and Bitcoin may not necessarily fall due to a single rate hike, but if the market begins to believe that real rates will remain high for an extended period, the valuations of future cash flows and high-risk assets will be recalculated.

Oil Prices Lower Inflation Tolerance

Oil prices are the first trigger for this divergence. Since 2026, conflicts related to the Middle East and Iran have repeatedly pushed energy prices higher. Brent crude oil briefly surpassed $100 per barrel last Monday, then retreated due to a pause in attacks between the US and Iran, with some contracts returning to around $90 or lower by July 27.

Rising oil prices not only affect fuel costs. The input costs for transportation, chemicals, aviation, and manufacturing will also be repriced. The Fed usually "looks through" short-term energy shocks, provided the shocks are short enough and do not spill over into wages and core service prices.

The US June CPI year-on-year remains at 3.5%, with core CPI year-on-year at 2.6%, still distant from the 2% target. If the rise in oil prices is merely a few weeks of geopolitical disturbances, the Fed can choose to wait. However, if it combines with potential tariffs, supply chain costs, and energy demand, the downward path of inflation will narrow.

This is also where the divergence between economists and traders lies. Economists place more importance on whether published data can prove a second rise in inflation, thus leaning towards no action in July. Traders, on the other hand, are more willing to price in tail risks in advance.

Strong Employment Weakens Rate Cut Justification

The second variable is the labor market. In the past week, the number of initial jobless claims in the US fell to 187,000, the lowest level since 1969. Its plain meaning is that companies are not laying off large numbers of employees, and the job market remains tight.

For the Fed, weak employment would provide a justification for rate cuts, while strong employment would increase inflationary pressures. As long as household income and consumption remain resilient, companies find it easier to pass on rising costs to end prices, making it harder for service inflation to decline quickly.

This does not mean that the US economy is necessarily overheating. Weekly initial claims data may be influenced by seasonal, statistical, and industry factors and cannot independently prove that wages and inflation are forming a spiral again. However, it is enough to weaken the argument that "the economy is rapidly cooling, so we must cut rates as soon as possible."

Market reactions are therefore focused on the rate path rather than simply trading on recession. The current situation resembles a combination of "inflation risks rising, growth still resilient." For the Fed, this is the most challenging state to handle: fearing inflation from rate cuts and fearing damage to assets and credit from rate hikes.

Hawkish Voices Provide Narrative for Traders

The sudden confidence in market pricing is also due to the emergence of clearer hawkish voices within the Fed. Dallas Fed President Lorie Logan publicly advocated for "moderately higher" rates on July 16, citing the need for better balance between inflation and employment goals.

Cleveland Fed President Beth Hammack's partial statements have also been interpreted by the market as hawkish. They cannot be directly understood as the overall stance of the FOMC, nor can they be equated with dissenting votes in this week's meeting, but for the market, such statements provide a narrative support.

This is the core of the clash of opinions. The interest rate futures market represented by CME FedWatch is merging oil prices, employment, and hawkish statements into a probability of "the Fed may need to tighten again." Most economists still believe that existing data is insufficient to prompt an immediate shift to rate hikes in the July meeting.

The two sides are not answering the same question. Economists answer "What is the Fed most likely to do this time?" while traders answer "If the old narrative is wrong, how much am I willing to pay for that probability?" The former is a baseline forecast, while the latter is more like risk insurance.

Can High Rates Return to the Baseline Scenario?

If the July meeting merely maintains rates, it cannot be simply viewed as a dovish victory. What truly affects asset prices is whether the statement and press conference place energy, employment, and inflation stickiness at a higher priority, and whether the Fed hints that it may still raise policy rates in the future.

Conversely, if oil prices continue to decline, core inflation components do not spread, and tariff shocks do not translate into visible price pressures, then the over 30% pricing for a rate hike before the meeting may prove excessive. At that time, support for the USD and short-term rates will weaken, and long-term bonds and risk assets may experience a reverse correction.

The boundary of this trading round is that the evidence is sufficient to support a shift in policy risk, but not enough to prove that the Fed has restarted the rate hike cycle. For investors, what needs to be judged this week is not whether to bet on a July rate hike, but whether a higher rate path is moving back towards the market's baseline scenario from tail risks.

Disclaimer: This content is provided for general branding and informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online events, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets or to use any services. Crypto assets are highly volatile and may result in loss. WEEX services and online events may not be available in all regions and are subject to applicable laws, regulations, and eligibility requirements. You are responsible for ensuring that your use of WEEX services complies with local laws and for carefully assessing the risks before participating in any crypto-related activities.