The Federal Reserve is still expected by futures traders and prediction markets to maintain the status quo at its July meeting, leaving interest rates unchanged once again. However, it's going to be a close call.
The odds are rising Monday that the central bank makes a move to hike.
There's now a 46.5% chance that the Fed hikes interest rates by a quarter point on July 29, according to CME's FedWatch tool. That's up from 34% on Sunday.
On prediction market platform Kalshi, traders now see a 36% chance of a hike, up from under 20% on Sunday and under 10% earlier this month.
The rise in odds comes after President Donald Trump announced he is reinstating the U.S. blockade of Iranian ports near the Strait of Hormuz, and imposing a 20% toll on all cargo through the passageway.
U.S. Oil prices rose in response on Tuesday, jumping more than 5% and crossing $75 per barrel.
Chances on Kalshi also jumped after Federal Reserve Governor Christopher Waller said the bank must not repeat the mistakes of 2021 and 2022, where he said the Fed waited too long to raise rates amid rising inflation. He added, though, that the bank shouldn't overcorrect and raise rates too quickly.
Odds of a hike are rising even as June inflation was expected to have cooled a bit. Economists surveyed by Dow Jones expect that inflation rose 3.8% annually in June, which is down from the rate in May of 4.2%. The Consumer Price Index report for June will be delivered on Tuesday.
But the inflation outlook could become more complicated if oil prices march higher again as the conflict in the strait resumes. And a Barclays note on Monday made the case that inflation concerns are now beyond solely energy prices.
Barclays global chairman of research Ajay Rajadhyaksha said that the pass-through of higher prices from the oil shock still isn't over, and that the lack of demand destruction from elevated energy prices has only exacerbated the inflation from it. He added that AI-induced price hikes are also deteriorating the inflation outlook.
All of this combines to create a situation for the Fed where it may have to turn increasingly hawkish, Rajadhyaksha wrote.
"A data-dependent framework means you respond to inflation prints, as well as forecasts," he wrote. "And the prints, for the next few months, are not going to look good."
The Federal Reserve will announce its next decision on interest rates on July 29.
Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.
Facts Only
* Futures traders and prediction markets expect the Federal Reserve to maintain interest rates at the July meeting.
* The chance of the Fed hiking interest rates by a quarter point on July 29 is 46.5% according to CME's FedWatch tool.
* Traders on Kalshi see a 36% chance of a hike, up from under 10% earlier in the month.
* President Donald Trump announced reinstatement of the U.S. blockade of Iranian ports and imposed a 20% toll on cargo.
* U.S. Oil prices rose more than 5% on Tuesday, crossing $75 per barrel.
* Federal Reserve Governor Christopher Waller stated the bank must avoid the mistakes of 2021 and 2022 regarding interest rate timing.
* Economists surveyed by Dow Jones expect inflation to rise 3.8% annually in June (down from 4.2% in May).
* The Consumer Price Index report for June is scheduled for Tuesday delivery.
* Barclays noted that inflation concerns extend beyond energy prices due to price pass-through and the lack of demand destruction from high energy prices.
* Ajay Rajadhyaksha stated that AI-induced price hikes are also deteriorating the inflation outlook.
Executive Summary
Futures traders and prediction markets still expect the Federal Reserve to keep interest rates unchanged at its July meeting. However, the probability of a rate hike is increasing, according to various tools. The odds that the Fed will hike interest rates by a quarter point on July 29 are now 46.5% based on the CME's FedWatch tool, an increase from 34% on Sunday. Similarly, traders on Kalshi see a 36% chance of a hike, up from under 10% earlier in the month.
This shift in expectations follows developments related to energy prices and statements from Federal Reserve officials. The rise in hike odds is contextualized by recent events, including President Trump's announcement regarding the U.S. blockade of Iranian ports and associated increases in U.S. oil prices. Furthermore, comments from Federal Reserve Governor Christopher Waller indicated a desire to avoid repeating past errors regarding interest rate timing amid inflation, while acknowledging the need to address current inflation prints.
Economists expect June inflation to have cooled slightly, with Dow Jones expectations showing an annual rise of 3.8% in June compared to 4.2% in May. The upcoming Consumer Price Index report on Tuesday will provide further data. Inflation outlooks are complicated by potential future rises in oil prices stemming from geopolitical conflicts and the impact of AI-induced price hikes, which Barclays suggests are deteriorating inflation forecasts beyond energy concerns alone.
Full Take
The narrative demonstrates a shift from a baseline expectation of stability toward increasing hawkishness driven by complex, intersecting macroeconomic pressures. The movement in prediction markets reflects an underlying tension between official signals and market anticipation regarding future policy shifts. The context provided by geopolitical events (Strait of Hormuz blockade) and structural inflation drivers (energy shocks and AI-related pricing) introduces volatility into the standard inflation/employment framework that the Fed typically monitors.
The tension identified lies in the conflict between observable data—like cooling June inflation estimates—and forward-looking risks suggested by external factors like persistent energy price pressures and the non-linear impact of technological inflation. The analysis pivots on how these inputs—macroeconomic uncertainty, geopolitical risk, and structural cost inflation—compel a central bank to adjust its stance. The argument presented by Rajadhyaksha suggests that a data-dependent framework necessitates responding to forward "prints," which are currently viewed as unfavorable despite short-term cooling in some metrics. This implies that the standard reaction function is being tested against externalities that are actively deteriorating the inflation outlook, forcing a potential shift toward more aggressive rate management than might be suggested by immediate CPI data alone.
The pattern suggests that market sophistication recognizes that inflation risk is multi-faceted: it is not solely an energy phenomenon but is increasingly intertwined with technological cost structures and external political risks. The implication for agency is that relying on a singular data point, such as the forthcoming CPI report, ignores the cumulative weight of these interconnected variables in determining future monetary policy trajectory. What are the necessary conditions under which policymakers must prioritize long-term structural stability over short-term deceleration when facing this complex environment? How should markets price the potential for non-linear reactions when geopolitical uncertainty feeds into core inflation drivers?
Sentinel — Human
This text reads like an informed synthesis of live market data, geopolitical risk, and central bank commentary, exhibiting strong human-style journalistic flow.