The Federal Reserve in the Waller Era is Too Hard to Predict! As the FOMC Approaches, the Market Still Can't Determine Next Week's Policy Direction

With only a few days left until the Federal Reserve’s next rate-setting meeting, the market remains highly divided over the direction of its policy—a rarity in recent years. Newly appointed Chair Walsh has completely abandoned his predecessor’s approach of forward guidance, fundamentally reshaping the way traders interact with Fed signals.

The interest rate swap market shows that traders currently estimate a roughly 30% chance that the Fed will hike rates by 25 basis points at the July 29 meeting, with a 70% probability it will keep rates unchanged. Such a high degree of disagreement so close to the meeting date is highly unusual in recent years.

According to a Bloomberg report on Thursday, Jim Bianco, President and Macro Strategist at Bianco Research, stated: “With no forward guidance, we’re going to see 20%, 30%, 40% probability distributions more frequently. The market is transitioning to this new way of thinking.”

The immediate impact of this uncertainty has already surfaced in the bond market. For traders betting on Fed moves, getting it right offers bigger rewards, while being wrong carries higher risks. The rates swap market has now fully priced in a 25-basis-point hike in September and signals more than two cumulative hikes before next March.

Walsh Breaks Convention: Forward Guidance Becomes History

Since taking office in May this year, Walsh has made it clear that he intends to abandon the Fed’s long-standing practice of signaling interest rate paths to the market in advance. He believes that forward guidance unnecessarily constrains policymakers when economic conditions change.

This position stands in stark contrast to that of his predecessor Powell. During Powell’s tenure, officials typically conveyed clear signals to the market ahead of meetings through speeches or the media. The last time there was similar uncertainty over a meeting’s outcome was in September 2024—when traders were split over whether the Fed would cut rates by 25 or 50 basis points; Powell ultimately opted for the larger cut to support a weakening labor market.

Inflation Pressures and Geopolitical Risks Intertwined: Rate Hike Expectations Swing

While Walsh refuses to provide forward guidance, he has clearly expressed his high level of concern about inflation. Since the pandemic, US inflation has remained well above the Fed’s 2% target, convincing the market that a rate hike this year is inevitable—the only controversy is about timing.

Bond traders leaned toward unchanged rates last week—US CPI saw its first decline in six years in June, chilling expectations for a near-term rate hike. However, the renewed escalation of the Iran-US conflict quickly drove up oil prices, and rate hike expectations bounced back as a result.

Economists and Traders See Rare Divergence

Notably, the economist community appears much more certain about next week’s meeting outcome than traders. According to a Bloomberg survey of 76 economists, all respondents expect the Fed to keep its benchmark rate unchanged at 3.5% to 3.75% during the July 28–29 meeting.

The division among traders, however, is much starker. John Brady, Managing Director at RJ O'Brien, said: “I still don’t think the Fed will hike rates next week, but the market is telling me the vote will be closer than I anticipated.”

This rare divergence between economists and the market exemplifies the changing market landscape under Walsh’s new style—without forward guidance, price signals are growing noisier, and uncertainty may become the new normal.