finIO

Markets Brief

← All briefs

The Most Finely Poised FOMC in Years: A One-in-Three Hike Is Priced

Kevin Warsh has withheld guidance into a decision markets haven't been this split on since December 2018, with 4.2% wartime inflation on one side and a hike that would be the first in three years on the other.

July 29, 2026 Rates & Fed

A genuine coin-toss, by design

Futures priced a 32% chance of a rate hike as of Tuesday night — per Deutsche Bank, the most uncertain markets have been going into a meeting since December 2018, when the eventual 25bp hike was about 65% priced the day before. Hike pricing has whipsawed, falling to 10% in mid-July after a soft June CPI print and reaching 38% on Monday. That volatility is itself the story: with Warsh shying away from policy guidance and clamping down on Fed communications, markets have lost the pre-meeting steer from officials' commentary or the financial press that they relied on for years. Deutsche Bank's US economists expect a hold but see hike risk as significant, and look for at least a couple of dissents in favour of a hike if rates are held.

The inflation case for going up

At the June meeting, committee members signalled their next move would likely be up, not down. A wartime spike in gasoline prices pushed annual inflation to 4.2% in May, the highest in more than three years, though it cooled somewhat last month — enough breathing room to justify a hold without abandoning the tightening bias. Warsh told the Senate Banking Committee that the committee has "no tolerance for persistently elevated inflation" and a "resolute commitment to restore price stability." The labour market isn't arguing against him: he described America's labour force as "broadly stable," with job creation keeping pace with the workforce and unemployment quite low and little changed over the past year — a contrast with the weakness that drove three cuts last year. Complicating the call, this week's oil retreat reversed overnight as crude firmed back above $87.

AI cuts both ways in the reaction function

Warsh has made AI an explicit policy input, establishing a task force led by outside economists and business people due to report by year-end. He is bullish on AI's eventual productivity gains — his best guess is improved real wages and support for full employment — but flagged that the path from short to long term "can have a disruptive effect." The near-term problem is that datacentre growth pushes up the price of building materials, electricity and computer chips, which puts the AI boom on the wrong side of the inflation ledger even as it props up the economy and the stock market. That tension is the analytical core of why this meeting is so hard to call.

What the plumbing is already doing

Rate markets have not waited. Mortgage rates rose across the board Wednesday, with the 30-year fixed at 6.69% (up 7bp), the 15-year at 6.07% (up 9bp) and the 5/1 ARM jumping 53bp to 6.99% — an ARM move of that size ahead of a decision reflects genuine uncertainty about the front end. Deposit rates are moving the other way, with the best CD rate at 4.15% (Synchrony's 14-month) and rates described as steadily declining from their peak. The split tells you banks are pricing duration risk higher while still assuming the policy path eventually eases.

Positioning: flat and waiting

Sterling was flat as traders awaited the verdict and stocks were muted into the decision, with S&P 500 futures up 0.2% and Nasdaq-100 futures up 0.3% while the Dow slipped 0.2% on higher oil. The Fed decision lands at 2:00 p.m. ET, immediately ahead of Microsoft and Meta results — a rare double catalyst that leaves little room for hedging one against the other.

Sources

Not investment advice.