Fed Rate Hike Odds Plummet as Oil Price Pullback and Iran Tensions Weigh on July Meeting

The Federal Reserve's July meeting is shaping up to be a closely watched event as market participants try to decipher the central bank's intentions. The probability of a rate hike in July has dropped to one-in-three, down from 40% last Thursday, according to CME FedWatch data.

This divergence reflects the unusual uncertainty surrounding this month's meeting, with the futures market and economist surveys pointing in different directions. Economists polled by FactSet still project no rate increase in 2026, while the futures-implied probability is derived from 30-day federal funds futures prices, which reflect positioning, hedging, and real money bets on the rate outcome.

The recent oil price pullback to $97 a barrel has contributed to the reduced hike odds. However, the September rate hike probability remains near 80%, as evidenced by CME's FedWatch tool. This reflects the market's expectation of ongoing inflationary pressures despite the June CPI report showing headline inflation falling to 3.5% year-over-year.

Chairman Kevin Warsh's deliberate refusal to signal his intentions has added to the uncertainty, with his statements avoiding forward guidance and instead focusing on the need for clarity in incoming data. This approach is a departure from previous Fed chairs, who would typically provide more insight into their thinking during press conferences.