After Powell Takes Over the Fed, Policy Uncertainty Rises and There Is a Significant Disagreement in the Market Over Whether There Will Be a Rate Hike in July.

As the July Federal Reserve meeting approaches under the leadership of new chairman Powell, the uncertainty of the Fed's policy path has significantly increased. With only a few days left before the meeting, there is still a significant disagreement in the market about whether the Fed will raise rates this month, a situation that has been rare in recent years. The interest rate swap market shows that traders currently expect a 30% probability of the Fed announcing a 25 basis point rate hike on July 29, with a 70% probability of keeping rates unchanged. Market participants believe that such clear expectations differentiation on the eve of the meeting may become a new normal in the Powell era. Jim Bianco, President and Macro Strategist at Bianco Research, stated that the removal of forward guidance means that the market will often see probabilities of 20%, 30%, or even 40% for rate hikes or cuts in the future, reflecting investors adapting to the Fed's new communication methods. The last time the market had such a large disagreement on the outcome of a Fed meeting was in September 2024. At that time, investors were divided on whether the Fed would cut rates by 25 basis points or 50 basis points. Ultimately, then-chairman Powell chose to cut rates by 50 basis points to address the weak U.S. labor market. Since becoming Fed chair in May of this year, Powell has repeatedly expressed his desire to end the Fed's practice of signaling rate paths through forward guidance. He believes that releasing policy signals in advance may limit the flexibility of decision-makers in a rapidly changing economic environment. For financial markets, this means that the risks and rewards of betting on the Fed's policy direction have increased. Investors who make correct judgments are likely to receive higher returns, while those who make mistakes will face greater losses. However, Powell has consistently emphasized that U.S. inflation has remained above the Fed's 2% target since the COVID-19 pandemic, so the market generally expects the Fed to resume rate hikes this year. The biggest question now is when this action will take place. Compared to traders, economists' judgments are more consistent. A survey shows that all 76 economists surveyed expect the Fed to maintain the federal funds target rate range at 3.5% to 3.75% at the July 28-29 meeting. In fact, data released last week showed that the U.S. Consumer Price Index (CPI) for June fell on a monthly basis for the first time in six years, leading the bond market to bet that the Fed would stand pat. However, with the recent escalation of tensions between the U.S. and Iran and the resurgence of international oil prices, concerns about rising inflation pressures have heightened, driving expectations of rate hikes. Currently, the interest rate swap market fully prices in a 25 basis point rate hike by the Fed in September and expects cumulative rate hikes of over 50 basis points by March next year, indicating that the market anticipates more than two rate hikes in the future. John Brady, Managing Director at RJ O'Brien, personally believes that the Fed will not raise rates next week, but market pricing shows that the policy decision at this meeting will be closer to his expectations than previously thought, with the outcome still uncertain.