According to the CME FedWatch Tool, 63,5 percent of market participants currently expect the Fed to keep its benchmark interest rate unchanged. Just one week ago, nearly 85 percent anticipated a pause in rate moves.

At the same time, 36,5 percent now expect the Fed to raise rates by at least 25 basis points. A week earlier, that share stood at just 15,5 percent.

Such a divided market consensus so close to a Fed meeting—with the decision due on Wednesday evening—is highly unusual. A key question will be how new Fed Chair Kevin Warsh assesses the inflation outlook and the recent surge in oil prices.

Another source of concern is the Personal Consumption Expenditures (PCE) Price Index—the Fed’s preferred inflation gauge—which remains elevated. The PCE index «continues to run well above the Fed’s 2 percent target,» wrote Ed Yardeni, president of Yardeni Research.

Conflicting Inflation Signals

The US economy created just 57,000 jobs in June, well below consensus expectations. Consumer prices rose 3,5 percent year-on-year, less than expected and down from 4,2 percent in May. Core inflation, which excludes the more volatile food and energy components, also eased compared with the previous month.

«With inflation signals pointing in different directions, the Fed’s decision-making process is becoming increasingly complex,» said Chengjun Chris Wu, Senior Portfolio Manager at Federated Hermes. If inflation continues to moderate, he believes the Fed could eventually consider cutting rates again. However, if price pressures remain elevated, further rate hikes could return to the agenda.

According to Bank of America, continued volatility in oil prices could «become embedded in core inflation.» The bank argues that the traditional monetary policy response of looking through temporary commodity price shocks is becoming less effective because prices for goods and services are proving increasingly sticky, allowing oil price fluctuations to have a more lasting impact.

Fed Faces a Particularly Close Call

Bank of America’s base-case scenario still assumes that the Fed will keep the federal funds rate unchanged at 3,50 to 3,75 percent. However, a recent 10 percent jump in WTI crude oil prices has made the decision «extremely close,» the bank said in a research note.

Jenny Zeng, Chief Investment Officer for Fixed Income at Allianz Global Investors, also expects the Fed to leave rates unchanged in July.

«The Fed remains in wait-and-see mode while keeping a close eye on inflation risks,» she wrote. Despite some easing in inflation, policymakers remain concerned about persistent price pressures and upside risks. Allianz therefore continues to expect a cumulative 50 basis points of tightening by year-end.

Blerina Uruci, Chief US Economist at T. Rowe Price, likewise expects the Fed to leave rates unchanged for now.

«Weaker inflation argues for stability, but energy prices, AI and the labour market remain key risks,» she wrote ahead of the meeting.

«Moving in the Other Direction»

«Our assumption at the beginning of June was that the rise in inflation would prove temporary, and the June data broadly supported that view,» said Don Rissmiller, Chief Economist at Baird Strategas.

The challenge, however, is that current conditions suggest future data could «move in the other direction.» Rissmiller pointed to the conflict in the Middle East, new tariffs and labour supply constraints as key risks.

«At the press conference following the last policy meeting, Fed Chair Kevin Warsh indicated that he would no longer provide forward guidance. As mentioned before, that in itself is not unusual,» wrote Michael Feroli of J.P. Morgan.

«What was more unusual, however, was that he declined to explain the committee’s decision-making process behind that meeting’s policy decision, simply saying: 'I have nothing to add beyond the statement itself.' He also avoided a more detailed discussion of the economic outlook.»

Hawkish Rhetoric or Another Rate Hike?

According to Kevin Thozet, a member of Carmignac’s Investment Committee, the sharp increase in expectations for a rate hike has «partly moved in parallel with energy prices.»

However, he argues that the reasons for a more hawkish Fed extend beyond fuel costs.

«Deportations and an ageing population are shrinking the US labour force. Even if another ceasefire or memorandum of understanding were reached with Iran, the case for another rate hike could remain intact.»

The crucial question, he said, is whether Warsh is merely trying to influence market expectations or is preparing investors for a genuine shift in monetary policy.

«For now, hawkish rhetoric alone may do part of the job. But that effect will not last indefinitely. Eventually, markets will demand an actual rate increase as proof.»

Diverging Views on the Policy Outlook

J.P. Morgan expects the Fed to keep rates unchanged for the rest of this year before beginning a gradual easing cycle in 2027. Barclays takes an even more cautious view. Chief Economist Marc Giannoni expects US interest rates to remain unchanged until the end of 2027.

Bank of America, by contrast, forecasts three rate hikes this year—25 basis points each in September, October and December. Deutsche Bank expects two increases before year-end.

With only limited guidance from Fed Chair Warsh, renewed tensions in the Gulf region and rising oil prices, this week’s Fed meeting has become one of the most closely watched monetary policy decisions in recent months.