With the Federal Open Market Committee set to release its decision in just over a day, investors face a higher-than-usual degree of uncertainty about whether the Fed will stand pat or deliver an unexpected rate increase. While consensus still favors no change, a growing faction of market participants is pricing in the possibility of a 25-basis-point rise at Kevin Warsh’s second meeting as chair.
Market data show 32% of participants expect a hike on Wednesday - a proportion that has fallen slightly from the previous day but has climbed sharply compared with roughly 16% a week ago. That jump in probability has coincided with a run-up in oil prices from June into July that briefly pushed Brent crude above $100 per barrel amid renewed U.S.-Iran tensions. West Texas Intermediate crude was trading at $79.31 as of Tuesday afternoon, down nearly 4% on the session, a pullback that could modestly reduce near-term pressure on the Fed to act.
The policy backdrop for Warsh's second meeting is notably different from the era of his predecessor. Unlike Jerome Powell, Warsh has intentionally stepped away from providing forward guidance - leaving markets without the familiar signaling anchors that policymakers frequently used over the past decade. Inflation remains above target, with the year-on-year pace at 3.5% in June, down from 4.2% in May, while the federal funds target range has been 3.50%-3.75% since December.
Advocates for a hike emphasize credibility and the desire to demonstrate firmness on inflation. Citadel Securities' head of macro strategy Frank Flight expects a 25-basis-point increase, arguing such a step would "emphatically end the forward guidance era" and underscore the Fed’s independence. Neil Dutta, chief economist at Renaissance Macro Research, expressed a similar view in a July 22 client note cited by Business Insider, writing: "You must pick your spots against the consensus, and I feel like this might be one of those times. Most everyone else on the FOMC is on board for a hike in September. It might be much better to go now when you can and demonstrate some modicum of control over the policy decision than to go in September when you don’t have much choice."
UBS Global Research strategists added they "would not be surprised if they raised rates … to demonstrate their inflation-fighting resolve." Analysts at Wrightson ICAP told Reuters the outcome "could go either way" but said they believe the Fed is "more likely to raise rates by 25 basis points on Wednesday than to stand pat," and noted Warsh would face little widespread opposition should he press for tightening.
Those arguing against an immediate hike point to sequencing risk. Former St. Louis Fed President James Bullard summarized that concern plainly: "They don’t usually do a one-and-done, so it really means ... the committee has to decide whether they’re going to commit to a sequence of rate increases. I don’t think they’re ready to do that at this meeting." The implication is that beginning a tightening cycle requires a commitment to follow-up moves, a decision some policymakers may not be prepared to make now.
Bank of America strategist Mark Cabana highlighted the rarity of hiking when the market has not strongly priced it in, noting that federal funds futures data since 1994 show the Fed has never hiked with less than 60% priced in beforehand. He characterized a hike under current pricing as "unprecedented."
Equities and volatility measures are reflecting these tensions without extreme moves. The S&P 500 was trading at 7,440.96, up 0.37% intraday, while the VIX sat at 18.06, down 3.27% on the session but still elevated relative to recent lows - a pattern consistent with heightened macro uncertainty around the upcoming decision.
Beyond the binary hold-or-hike outcome, observers are focused on the specific language the FOMC will use. In particular, market participants are watching whether the statement retains or drops the phrase "attentive to inflation risks," a choice that could shape expectations for September. After the 2:00 p.m. ET decision on Wednesday, Warsh’s press conference at 2:30 p.m. ET is expected to be the primary market-moving event, given his deliberate move away from the more guidance-oriented approach adopted by his predecessor.
What to watch next
- Whether the Fed lifts rates by 25 basis points, affirming those who argue for demonstrating inflation-fighting resolve.
- The retention or removal of the phrase "attentive to inflation risks" in the FOMC statement, which markets view as a signal about the likely path toward September.
- Chair Warsh’s remarks at the 2:30 p.m. ET press conference, which could clarify the Fed’s approach in the absence of traditional forward guidance.