① Neil Dutta, chief economist at Renaissance Macro Research, believes the market could be surprised by an unexpected rate hike at the Federal Reserve’s meeting this week; ② he highlighted a key reason: acting now would allow the Fed to avoid being forced into a corner in the coming months; ③ although the view of a 'July rate hike' remains a minority position on Wall Street, Dutta is not alone—several other analysts have also pointed to this possibility.
The Federal Reserve will hold its monetary policy meeting on July 28–29. Investors widely expect the central bank to remain on hold at this week’s meeting and raise interest rates at its September meeting, but some Wall Street analysts have noted that the rate hike could come significantly sooner than anticipated.
Neil Dutta, chief economist at Renaissance Macro Research, believes the market could be surprised by an unexpected rate hike at the Federal Reserve’s meeting this week.
“You have to look for moments when you can diverge from consensus, and I think this might just be one of those moments,” Dutta wrote recently in a client report titled “Why Not Hike Now?”
Dutta stated that given Federal Reserve Chair Kevin Warsh’s hawkish remarks at his first meeting last month and the persistent conditions underpinning high inflation, a rate hike in the coming months is “obvious.” These conditions include a resilient labor market, substantial AI-related spending, high oil prices, and tariffs. He noted that services inflation is trending upward and that rising oil prices will continue to feed through into service-sector costs.
U.S. CPI inflation stood at 3.5% in June, down from 4.2% in May, but still significantly above the Fed’s 2% target. Last Thursday, as tensions escalated between the U.S. and Iran, Brent crude prices surpassed $100 per barrel for the first time since May. Amid renewed inflation concerns, the yield on the 10-year U.S. Treasury note rose to 4.7% that day.
The current federal funds rate stands in the range of 3.5% to 3.75%. According to CME’s 'FedWatch Tool,' the probability of the Fed holding rates steady in July is 63.7%, while the probability of a cumulative 25-basis-point hike is 36.3%. By September, the probability of no change drops to 19.6%, the probability of a cumulative 25-basis-point hike rises to 55.2%, and the probability of a cumulative 50-basis-point hike stands at 25.2%.
However, Dutta identified a major reason why a rate hike could come earlier than September: acting now would enable the Fed to avoid being cornered in the months ahead.
“Most other members of the FOMC (Federal Open Market Committee) supported a rate hike in September. Acting sooner rather than waiting until September, when options may be limited, would demonstrate control over policy decisions,” Dutta wrote. “In other words, acting early would allow Worshe to retain flexibility in future policy decisions.”
Warsh assumed the role of Federal Reserve Chair in May, following the conclusion of Jerome Powell’s second term. To date, he has consistently emphasized the Fed’s resolve to combat inflation.
Is the risk of a surprise rate hike non-negligible?
According to a recent media survey of 76 economists, all respondents expected the Federal Reserve to keep its benchmark interest rate unchanged in the range of 3.5% to 3.75% at its meeting on July 28–29.
Although the market widely expects the Fed to raise rates in September, a July hike remains a minority view on Wall Street. However, Dutta is not alone—several other analysts have also pointed to this possibility. For investors, the risk of a rate hike by the Fed this week cannot be ignored.
Macro strategist Michael Ball stated last week that, given persistently high inflation, solid economic fundamentals, an increasing number of FOMC voting members supportive of tightening, and the Fed’s strong incentive to act early to bolster its credibility—and thereby ultimately reduce the extent of subsequent tightening—the market may still be underestimating the likelihood of a July rate hike by the Federal Reserve.
Ball believes that if the Fed were to deliver a surprise rate hike this week, it would dampen market risk appetite, flatten the U.S. Treasury yield curve, strengthen the U.S. dollar, and weigh on duration-sensitive assets.
Joe LaVorgna, Chief U.S. Economist at SMBC Nikko Securities America and former economic advisor to Treasury Secretary Scott Bessent, posed the question directly: "If we can raise rates now, why wait until September?"
Ed Yardeni, president of Yardeni Research, had previously forecast that the Federal Reserve might raise rates in July, noting at the time that the two-year U.S. Treasury yield was climbing steadily—having already risen well above 4%—as this yield typically moves in tandem with the federal funds rate.
Editor/rice