Fed Hike Odds Narrow as Markets Watch for July Decision

Financial markets are bracing for a close call at the upcoming Federal Open Market Committee (FOMC) meeting, where the Federal Reserve is expected to keep the federal funds rate unchanged. According to BNY strategists John Velis and David Tam, market pricing assigns only a one-third chance of a hike this week.

The FOMC's decision will be driven by incoming US inflation data and Middle East-related energy shocks. With many market observers calling for an immediate hike, Velis and Tam argue that implied rate hike probabilities can switch quickly, making it wise to wait and see the impact of rising energy prices on aggregate indices.

The strategists expect two more CPIs and two more PCE deflators to be published before September 16, which will likely move the needle definitively one way or the other. If the Fed elects not to change rates, they predict a 'hawkish hold' that leaves the market expecting September to be a sure thing.