Fed's Warsh faces rate decision as hike odds jump to 27%

Markets are pricing a 27% probability the Federal Reserve will raise rates this week, a fourfold increase from a week ago, as Chair Kevin Warsh prepares for his first major policy decision since taking the helm.

The Federal Reserve under Chair Kevin Warsh faces its first major policy test Wednesday, with markets pricing a 27% chance of a rate hike — up from 6% a week ago — as inflation remains above the central bank's 2% target.

"Warsh could still surprise Wall Street with a rate hike," said Michael McKee, Bloomberg's Fed correspondent. "The new chair's less guidance-driven approach marks a departure from the previous regime of holding rates steady."

The current federal funds target range stands at 3.50% to 3.75%, where it has remained since the last adjustment. Odds of a rate increase at the July 28-29 meeting rose to 26.8% from 6% a week ago, while September meeting probabilities climbed to 60.5% from 38%, according to CME FedWatch data. A Bloomberg poll of economists, however, shows most expect rates to remain unchanged.

A rate hold would likely support current risk asset valuations, while a surprise hike could trigger a broad sell-off across equities, strengthen the dollar and push bond yields higher. The decision will signal whether Warsh intends to continue the previous Fed's patient approach or adopt a more aggressive stance against inflation that remains above the 2% target.

The last time the Fed held rates steady for an extended period before surprising markets was in 2015, when the central bank delayed its first post-crisis hike until December despite earlier guidance for a September move. The S&P 500 fell 2.6% in the two weeks following that September hold as investors repriced the rate path. A similar dynamic could play out this week if Warsh delivers a hawkish hold — keeping rates unchanged but signaling a September hike is likely.

Warsh has acknowledged the housing market remains sluggish because mortgage rates are high, but has not indicated when relief for homebuyers might come. The 30-year fixed mortgage rate averaged 6.43% in the week ending July 1, according to Freddie Mac, down slightly from recent peaks but still well above the sub-4% levels seen before the tightening cycle began.

The 10-year Treasury yield, which tracks closely with rate expectations, has risen 15 basis points over the past two weeks as markets repriced hike probabilities. The dollar index has strengthened 0.8% over the same period, reflecting the shift in rate differentials. Equity markets have been more resilient, with the S&P 500 holding near recent highs, suggesting investors remain split on whether Warsh will follow through.

The Fed's decision is scheduled for release at 2 p.m. Wednesday in Washington, followed by Warsh's press conference at 2:30 p.m. The next scheduled meeting after July is Sept. 22-23, by which point markets are pricing a 60.5% probability of a rate increase.

This article is for informational purposes only and does not constitute investment advice.