Due to the dual impact of hawkish statements from Federal Reserve Governor Waller and soaring oil prices, the market probability of a 25 basis point rate hike by the Federal Reserve in July has risen to nearly 50%.

Written by: Dong Jing, Wall Street Insights

The dual impact of soaring oil prices and hawkish statements from Federal Reserve officials is pushing market expectations for a rate hike in July to a critical point.

On Monday, the pricing in the money market showed that the probability of a 25 basis point rise by the Federal Reserve this month had risen to nearly 50%, up from less than 40% previously. This shift was driven by the clearest hawkish signal yet from Federal Reserve Governor Waller, who indicated that if inflation data this week remains hot, the FOMC will need to consider tightening monetary policy in the near term. Meanwhile, escalating geopolitical tensions saw Brent crude oil prices rise by nearly 10% in a single day, further strengthening market concerns over persistent inflationary pressures.

U.S. Treasury yields subsequently rose across the board. The two-year U.S. Treasury yield, which is most sensitive to Fed policy expectations, climbed by about 7 basis points in one day, reaching 4.28%, the highest level since February 2025; the 10-year yield rose to 4.62%, a new high since May.

This week’s focus will be on the U.S. June CPI data released on Tuesday, as well as Federal Reserve Chairman Warsh’s congressional testimony. The market generally believes that these two events will have a decisive impact on the policy direction of the FOMC meeting on July 29.

Waller Defines Rate Hike Triggers

Waller’s statements on Monday were seen by the market as the clearest warning signal of a rate hike to date.

Wall Street Insights article stated that Nick Timiraos from the "New Federal Reserve News Agency" wrote that Waller explicitly stated:

“If we see another hot core inflation data this week, then the Federal Open Market Committee will need to consider tightening monetary policy in the near term.”

Waller pointed out that the Federal Reserve's preferred inflation measure—the core personal consumption expenditure (PCE) index excluding food and energy—has seen a year-on-year increase of 3.4% as of May and has been rising since January, starting its ascent even before the outbreak of the U.S.-Iran conflict.

He noted that the factors pushing inflation upward include tariffs, energy prices, and large-scale investments in artificial intelligence infrastructure. “In whatever way measured, inflation is on the rise this year,” he said, “I am currently concerned about the high trend of core inflation.”

Waller’s stance matches the direction of the FOMC meeting minutes from last month, which indicated that half of the 18 officials expect to raise rates by at least 25 basis points at some point this year, with the rate hike option moving from a fringe topic to the center of policy discussions.

Meanwhile, the sudden escalation of geopolitical tensions has fueled inflation expectations. Following a new round of military clashes between the U.S. and Iran, Brent crude oil saw a one-day increase of 9.9%, with conflicting statements from both sides regarding the status of the Strait of Hormuz. Trump stated that the U.S. is "restoring" its blockade on Iranian vessels, further intensifying market concerns over disruptions to global energy supply.

The sharp rebound in energy prices directly reinforces the market's judgment that inflationary pressures are difficult to subside, resonating with Waller’s hawkish stance and prompting a rapid re-pricing of short-term interest rates.

CPI and Warsh's Testimony as Key Variables This Week

This week's policy signals will be centered around two key points. The market anticipates that the year-on-year increase in June CPI will ease from 4.2% in May to 3.8%, but still well above the Federal Reserve's 2% policy target; core CPI is also expected to slightly decline, but remains at a high level.

TD Securities U.S. rate strategist Molly Brooks stated:

“The market’s recent increase in expectations for a rate hike is a direct response to Waller’s comments. This makes tomorrow’s CPI data even more critical, and therefore more volatile—if the data is hot, it will face the risk of further bear flattening.”

Meanwhile, Federal Reserve Chairman Warsh will participate in a congressional hearing for the first time in his capacity as chairman this week. Warsh previously pledged to reduce forward guidance on interest rate prospects, and the content of his testimony will be closely scrutinized by the market. BMO Capital Markets U.S. rate strategy head Ian Lyngen said:

“Investors continue to focus on the FOMC meeting on July 29, viewing it as a potential window for Warsh’s first rate hike. The combination of Tuesday's CPI data and Warsh's testimony is bound to significantly change the probability of a rate hike in one direction.”

Although the probability of a rate hike is nearing 50%, the baseline expectation for most investors remains no rate hike this year.

Wall Street Insights also reported that Waller simultaneously stated that if he sees a lower core inflation reading, he would support remaining on hold, but he also outlined conditions: “After the sustained rise in inflation during the first half of this year, I need to see several months of cooling data to confirm that inflation is moving in the right direction.”

Moreover, Waller also explicitly referenced policy mistakes during the pandemic inflation period as a cautionary tale, warning that the FOMC faced widespread criticism for failing to raise rates in a timely manner, and that such mistakes should not be repeated. “The FOMC must be prepared to prevent a recurrence of the inflationary situation from 2021 to 2022 by tightening monetary policy,” he said.

Macro strategist Alyce Andres pointed out that Waller’s statements on Monday effectively clarified the Federal Reserve’s reaction function, transmitting hawkish signals while simultaneously lowering the market’s uncertainty premium regarding the Fed's policy path.

Analysis indicates that this means that the data and testimonies this week will largely determine whether the market needs to further reprice expectations for a rate hike.