Markets Expect a Pause. Wall Street Isn't So Sure.

With the July 28–29 FOMC meeting just days away, markets are overwhelmingly betting that the Federal Reserve will keep interest rates unchanged. But a small group of Wall Street economists believes investors may be underestimating the risk of a surprise hike.

Neil Dutta, Chief Economist at Renaissance Macro Research, argues that the Fed has little reason to wait until September if policymakers already believe inflation remains a threat.

In a note titled "Why Not Hike Now?", Dutta pointed to a resilient labor market, persistent services inflation, strong AI-driven investment, higher oil prices and tariffs as reasons the Fed could tighten policy sooner rather than later.

"Rather than waiting until September and risking being forced into action, the Fed could move now and preserve greater policy flexibility later," he wrote.

For now, markets remain unconvinced. According to the CME FedWatch Tool, traders see a 63.7% chance that the Fed leaves rates unchanged this month, while the probability of a 25-basis-point hike stands at 36.3%. By September, however, markets expect another hike to become the more likely outcome.

The hawkish argument has gained traction as Brent crude climbed back above $100 per barrel, raising concerns that higher energy prices could fuel another wave of inflation. US Treasury yields have also moved higher, with the benchmark 10-year yield approaching 4.70%.

Former US Treasury adviser Joe Lavorgna questioned the logic of waiting, asking:

"If they can hike now, why wait until September?"

Whether the Fed hikes this week or not, the policy statement and Chair Kevin Warsh's guidance may matter even more than the decision itself. Any signal that policymakers are preparing markets for another rate increase could lift the US Dollar and Treasury yields while putting renewed pressure on gold and other risk assets.

For investors, the biggest risk this week may not be an actual rate hike—but a much more hawkish Fed than markets are expecting.