Fed Interest Rate Decision Hinges on Surprise 25bp Hike Possibility

ING's Padhraic Garvey expects the Federal Reserve (Fed) to keep interest rates unchanged at its upcoming meeting, citing calmer June inflation readings and reduced geopolitical tensions with Iran as reasons for this decision. The odds are seen around 60:40 in favor of no change.

Garvey notes that while there is a 'non-negligible risk' of a surprise 25bp hike, the structure of the curve does not suggest a rate hiking cycle is likely to begin with the Fed. He also points out that the 5-year bond yield is rich compared to the rest of the curve, which is an unusual situation for the Fed to start a rate-hiking cycle.

Garey believes that if the Fed were to hike rates now or in the next meeting, it would be a protective move due to rising inflation. He also speculates that Federal Reserve member Warsh might consider hiking rates at this meeting to show some independence from market expectations.