The market is focused on the Federal Reserve's interest rate meeting on July 28-29. The mainstream expectation is to maintain the benchmark interest rate at 3.5%–3.75%, but the risk of a rate hike has not been eliminated, with significant disagreements among FOMC members. Although June's CPI cooled somewhat, the Middle East conflict is impacting oil prices, and a new round of tariffs is looming, meaning the risk of a rebound in inflation remains. Hawkish members within the Fed are calling for a rate hike as soon as possible, while others advocate waiting for more evidence of improved inflation. Trading is betting on a delay in policy action, making September a crucial window. Trump's public pressure for rate cuts conflicts with the Fed's price stability goal. Whether a rate hike will occur this year depends heavily on oil price movements and subsequent PCE inflation data; the Jackson Hole symposium in August may release important policy signals.

Current policy environment: Inflation remains resilient, but multiple external risks loom.

Federal Reserve Chairman Warsh has repeatedly emphasized that price stability is the core policy objective. Although the June CPI fell to 3.5%, it remains well above the 2% inflation target. A larger variable comes from external factors: the turmoil in the Middle East is pushing up oil prices, coupled with the implementation of new tariffs, creating a new round of imported inflationary pressures. The current economy exhibits a fragmented character: the labor market is robust, and the economy continues to expand, but the risk of inflation persists. Monetary policy is caught in a dilemma: interest rate cuts stimulate employment but could easily push up prices; interest rate hikes curb inflation but would raise overall financing costs and suppress the economy.

The Federal Reserve is divided: hawks are calling for action, while those waiting to see the data.

The FOMC members are clearly divided. The core hawkish camp consists of Cleveland Fed's Hammark, Dallas Fed's Logan, and Fed Governor Waller, who are concerned about sticky core inflation and the potential for oil price volatility to further push up prices, supporting a swift rate hike. Many other members remain cautious, hoping to wait for more empirical evidence of sustained inflation decline and are unwilling to hastily tighten monetary policy. Analysts predict intense internal debate at this meeting. The Fed's three consecutive rounds of preventative rate cuts by the end of 2025 have already ended with rising inflation risks.

Market interest rate expectations have been adjusted significantly.

CME Group's FedWatch tool shows: 1. The probability of keeping interest rates unchanged in July is 63.5%, while the probability of a 25bp rate hike is 36.5%, with uncertainty reaching a recent high; 2. The market is pricing in a 79.6% probability of at least one rate hike by September; 3. Traders are beginning to price in a cumulative 50bp rate hike by the end of the year, with interest rates expected to reach 4.00% to 4.25%. Institutional opinions are divided: If oil prices continue to rise, the Fed is highly likely to raise rates in September; if energy prices fall significantly, there is a possibility that there will be no rate hike this year.

Key observation timeline

1. July 25: Release of the June PCE price index, a key inflation indicator closely watched by the Federal Reserve; 2. July 28-29: July FOMC policy meeting; 3. August Jackson Hole Economic Symposium: Warsh will deliver his first keynote speech since taking office, potentially providing clues about September's policy; 4. September 15-16: The next FOMC meeting, a crucial policy window for current market pricing. It's worth noting that the June post-meeting statement removed forward guidance; the market will need to rely on official speeches and signals from the symposium to glean policy direction.

External political pressure continues to interfere

President Trump has publicly called on the Federal Reserve to cut interest rates significantly, hoping the US will have the lowest interest rates in the world, thereby boosting the housing market and reducing interest payments on the massive federal debt. In the long run, the White House's demands are inherently contradictory to the Fed's anti-inflation goals, continuing to constitute a potential source of market volatility.

Summarize

The Federal Reserve is likely to hold rates steady in July, but a rate hike cannot be completely ruled out. Volatile oil prices and tariff shocks have created inflation uncertainty, and there is a significant divide between hawks and neutrals on the committee. The market has postponed rate hike expectations to September, with subsequent PCE data, the Middle East energy situation, and the Jackson Hole speech in August becoming key indicators. Meanwhile, the White House continues to pressure for rate cuts, intensifying policy maneuvering. As long as inflation remains resilient, the high-interest-rate environment is unlikely to reverse quickly.