Federal Reserve July hike odds rise as oil shock clouds inflation outlook

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Fed July rate hike outlook

Highlights

CME's FedWatch tool shows July 29 odds for a 25 basis point Federal Reserve rate hike rising to 46.5%, up from 34% on Sunday.
Oil price jumps linked to U.S.-Iran conflict near the Strait of Hormuz have increased market concerns that inflation could rise again.
Barclays warns inflation risks now extend beyond energy, complicating the outlook despite Dow Jones survey projecting June inflation cooling to 3.8% from 4.2% in May.

Market pricing shifts before July meeting

As reported by CNBC, CME's FedWatch tool now puts the chance of a 25 basis point Federal Reserve rate increase on July 29 at 46.5%, up from 34% on Sunday. On prediction market platform Kalshi, traders see a 36% chance of a hike, compared with under 20% on Sunday and under 10% earlier this month.

The repricing follows a jump in oil prices tied to the latest developments in the conflict involving the U.S. and Iran near the Strait of Hormuz. Even with those gains in hike expectations, futures traders and prediction markets still broadly expect the central bank to leave interest rates unchanged at its July meeting.

Kalshi odds also move higher after Federal Reserve Governor Christopher Waller says the central bank must not repeat what he describes as the mistakes of 2021 and 2022, when it waited too long to raise rates as inflation accelerated. He also says policymakers should avoid overcorrecting by tightening too quickly.

Inflation risks extend beyond energy

June inflation is expected to show some cooling, with economists surveyed by Dow Jones forecasting annual inflation of 3.8%, down from 4.2% in May. The June Consumer Price Index report is due on Tuesday, giving policymakers and investors a fresh reading on price pressures before the July meeting.

Still, the inflation outlook becomes more complicated if oil prices rise further as conflict in the strait resumes. A Barclays note on Monday argues that inflation concerns now extend beyond energy alone, suggesting the Federal Reserve may face broader pressure if higher costs spread through the economy.

In our earlier article on the drop in commercial ship traffic through the Strait of Hormuz, we outlined how intensified U.S.–Iran fighting and attacks on vessels pushed shipping away from the U.S.-protected corridor and disrupted normal transit patterns. We noted that the route shift increased risks for crude flows and maritime security, adding fresh uncertainty to a key global energy chokepoint.

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