76 economists unanimously predict no change, but traders bet on fierce division.

Written by: Zhao Ying, Wall Street Journal

With just a few days left until the next Federal Reserve meeting, the market's judgment on its policy direction remains highly divided—something quite rare in recent years. The new chairman, Waller, has completely abandoned the forward guidance commonly used by his predecessor, fundamentally reshaping the information game rules between traders and the Federal Reserve.

The interest rate swap market shows that traders currently expect a 30% probability of a 25 basis point rate hike at the July 29 meeting and a 70% probability of maintaining rates. Such a significant division so close to the meeting date is extremely rare in recent years.

According to a report by Bloomberg on Thursday, Jim Bianco, president and macro strategist at Bianco Research, stated: "Without forward guidance, we will frequently see probability distributions of 20%, 30%, and 40%. The market is transitioning to this new way of thinking."

This uncertainty's direct impact has already been seen in the bond market. For traders betting on the Federal Reserve's direction, correctly guessing will yield greater rewards, while guessing incorrectly will face larger losses. The interest rate swap market has fully priced in a 25 basis point hike in September and implies cumulative hikes of more than two times before March of next year.

Waller breaks tradition, forward guidance becomes history

Since taking office in May, Waller has clearly stated that he will abolish the Federal Reserve's long-standing practice of signaling the interest rate path to the market. He believes that forward guidance imposes unnecessary constraints on policymakers when economic conditions change.

This stance sharply contrasts with that of his predecessor, Powell. During Powell's leadership at the Federal Reserve, officials typically communicated clear signals to the market through speeches or media channels before meetings. The last time there was a similar level of uncertainty about meeting results dates back to September 2024—when traders were divided on whether the Federal Reserve would cut rates by 25 basis points or 50 basis points, and Powell ultimately chose the larger cut to support a weakening labor market.

Inflation pressures and geopolitical risks intertwine, rate hike expectations waver

While Waller refuses to provide forward guidance, he has clearly expressed high vigilance against inflation. Since the pandemic, U.S. inflation has consistently exceeded the Federal Reserve's 2% target, leading the market to firmly believe that a rate hike within the year is inevitable, with the only dispute being the timing.

Bond traders leaned toward maintaining interest rates last Monday—a decrease in the U.S. consumer price index in June marked the first drop in six years, cooling expectations for a rate hike in the near term. However, the escalation of conflict between the U.S. and Iran subsequently pushed oil prices higher, and rate hike expectations also rose accordingly.

Rare divergence between economists and traders

Notably, the cohort of economists is far more certain about the outcome of next week's meeting than traders. According to a Bloomberg survey of 76 economists, all respondents expect the Federal Reserve to maintain the benchmark interest rate in the range of 3.5% to 3.75% during the meeting on July 28 to 29.

In contrast, the divergence among traders is much more pronounced. John Brady, managing director at RJ O’Brien, stated, "I still don't think the Federal Reserve will hike rates next week, but the market is telling me that this voting outcome will be closer than I expect."

This rare divergence between economists and the market reflects the changes in market ecology brought about by Waller's new style—in an era absent of forward guidance, the noise of price signals will be significantly amplified, and uncertainty may become the new norm.