Kevin Walsh's Federal Reserve is already making its distinct mark on financial markets. With just days remaining before the next policy meeting, traders remain deeply divided on whether the central bank will raise interest rates.
Interest-rate swaps indicate traders see about a 30% probability of a 25-basis-point hike from the Fed next week, with the odds of no action at around 70%. Such a wide divergence of opinion this close to a meeting has been rare in recent years, but under Walsh's leadership, this may become a more common occurrence. The new Chair has broken from his predecessor's practice of pre-signaling the central bank's next moves.
"The absence of forward guidance means we will often see probabilities like 20%, 30%, 40% going forward," said Jim Bianco, President and Macro Strategist at Bianco Research. "The market is shifting to this new way of thinking."
The last time market uncertainty about a Fed meeting outcome was this high was in September 2024. At that time, traders were split on whether the Fed would cut rates by 25 or 50 basis points. Then-Chair Jerome Powell ultimately opted for a 50-basis-point cut to support a weakening labor market.
Since taking office in May, Walsh has committed to ending the Fed's long-standing practice of signaling its interest rate path. He believes such forward guidance can unnecessarily constrain policymakers as economic conditions evolve. For traders, this significantly raises the stakes of their bets, offering the potential for greater rewards for correct calls and larger losses for incorrect ones.
However, Walsh has made clear he believes it is necessary to curb inflation, which has remained above the Fed's target since the pandemic. This has convinced traders that the Fed will raise rates before year-end, with the only question being the timing.
Economists are more certain about next week's outcome than traders are. All 76 economists surveyed by Bloomberg forecast the Fed will hold rates steady in the 3.5% to 3.75% range at its July 28-29 meeting.
Bond traders briefly shifted toward this view last week when data showed U.S. consumer prices fell in June for the first time in six years. But since then, escalating U.S.-Iran tensions have pushed oil prices higher again, gradually lifting market expectations for a rate hike.
The swaps market is now fully pricing in a 25-basis-point Fed hike by the end of September and indicates more than two cumulative hikes by the end of March next year.
"I still think the Fed won't hike next week, but the market is signaling this could be a closer vote than I anticipated," said John Brady, Managing Director at RJ O’Brien.
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