Warsh Leaves Bond Traders in the Dark on Next Week’s Rate Move

(Bloomberg) — The Kevin Warsh Fed is already putting its stamp on financial markets: Just days before the central bank’s next meeting, traders are still split on whether it’s going to raise interest rates or not.

Most Read from Bloomberg

Swaps markets indicate traders see a roughly 30% chance that the Federal Reserve will raise its benchmark rate by a quarter-percentage point on July 29 and a 70% chance that it will keep it where it is. That kind of split so close to a meeting has been exceedingly rare in recent years but may become far more common under Warsh, who as the new chairman has broken with his predecessors’ practice of hinting at the bank’s next moves in advance.

“No forward guidance means we’re going to see 20%, 30%, 40% probabilities regularly,” said Jim Bianco, president and macro strategist at Bianco Research. “The market is transitioning to this new way of thinking.”

The last time there was so much doubt about the outcome of a Fed meeting was in September 2024, when traders were divided on whether the Fed would cut rates by a quarter or half percentage point that month. Jerome Powell, who headed the Fed at the time, ultimately opted for the larger reduction to shore up a weakening labor market.

Since taking office in May, Warsh has pledged to scrap the Fed’s long-standing practice of signaling the likely path of interest rates, arguing that such forward guidance can unnecessarily constrain policymakers as economic conditions change. For traders, that’s significantly upped the stakes — dangling bigger gains for those who call the Fed’s moves right and bigger losses for those caught wrongfooted.

He has been clear, though, that he sees the need to rein in inflation that’s stayed above the Fed’s target ever since the pandemic, leaving traders convinced that the central bank will raise rates before the year is out. The only question is when.

Economists are more confident than traders about the outcome of next week’s meeting. Every one of the 76 economists surveyed by Bloomberg expect the Fed to keep the borrowing costs unchanged in a range between 3.5% and 3.75% at the July 28-29 meeting.

Bond traders briefly came to that view last week, when data showed US consumer prices fell in June for the first time in six years. But a renewed escalation in the US-Iran conflict has since sent oil prices up again, gradually pushing rate-hike expectations higher along with it.