Fed likely to hold rates steady in July meeting, Sept. rate hike still looms: Analysts

The US Federal Reserve is widely expected to leave interest rates unchanged at its meeting on July 28–29, amid growing uncertainty over the future path of monetary policy. This comes as inflation remains above the central bank's 2% target despite improvements in some price indicators and a recent easing in energy-related inflationary pressures.

Analysts surveyed by Argaam expect the Federal Reserve to keep the federal funds target range at 3.50%–3.75% at its July meeting. While rates are likely to remain unchanged in the near term, risks continue to tilt toward tighter monetary policy, particularly if inflationary pressures re-emerge, leaving the possibility of a September rate hike firmly on the table.

Ahmed Azzam, Head of Research at Equity Group

Ahmed Azzam, Head of Research at Equity Group, said that the Federal Reserve is most likely to keep rates unchanged. He noted that the July meeting is among the most sensitive of the year, as consensus around the policy decision has become less clear than at previous meetings.

He added that the increased probability of a rate hike in the hours leading up to the decision suggests the outcome is no longer fully priced in and that even a modest change in the policy statement or the voting pattern among Federal Open Market Committee (FOMC) members could trigger significant market moves.

Inflation Improvement Supports Rate Fixing, but Risks Persist

Azzam said the latest inflation reading provides the Fed with justification to wait. The Consumer Price Index (CPI) declined by 0.4% month-on-month in June, while core inflation stood at 2.6% year-on-year, supported by lower energy prices during the month.

However, he cautioned that this improvement could prove temporary if oil prices rise again and geopolitical tensions intensify. Inflation, he noted, remains above the Fed's 2% target.

Azzam also pointed out that the Federal Reserve continues to face several sources of inflationary pressure, including energy costs, the pass-through effects of tariffs on goods prices, and robust investment spending related to artificial intelligence.

He added that the minutes from the June meeting revealed extensive discussion regarding the risk of inflation remaining elevated because of these factors, with several participants viewing persistent price pressures as justification for further monetary tightening.

Barclays: Holding Rates Is the Baseline Scenario

Meanwhile, Barclays expects the Federal Reserve to maintain the policy rate at 3.50%–3.75%, citing weaker-than-expected inflation data in June and its forecast that core inflation will continue to moderate over the coming months.

The bank expects only limited changes to the FOMC statement compared with June, while reaffirming the central bank's commitment to price stability.

Barclays also expects two—and possibly three—FOMC members to dissent in favor of a 25-basis-point rate hike, resulting in either a 10–2 or 9–3 vote in favor of keeping rates unchanged.

The bank noted that, as of 24 July, financial markets were pricing in a more than 35% probability of a July rate hike, driven by renewed inflation concerns and higher oil prices amid tensions in the Middle East.

Nevertheless, Barclays' baseline scenario remains unchanged interest rates through the end of 2027, although risks are strongly skewed toward additional tightening should inflation remain elevated or economic activity and the labor market accelerate again.

Ahmed Shuraim, economic analyst

Ahmed Shuraim, economic analyst, likewise said that leaving rates unchanged remains the most likely outcome, although markets are paying closer attention to signals regarding the future path in upcoming monetary policy meetings.

The Vote Could Deliver the Strongest Signal

Azzam believes the clearest message may come from the voting results rather than the wording of the policy statement.

Although the June meeting concluded with a unanimous decision to leave rates unchanged, the meeting minutes revealed greater disagreement over the future direction of monetary policy.

He said Lorie Logan and Beth Hammack appear to be the most likely dissenters in favor of raising rates, based on their assessment that inflation is not moving sustainably toward the Fed's 2% target and that the labor market remains sufficiently resilient, reducing the need to prioritize employment risks.

According to Azzam, one or two votes in favor of higher rates would make an otherwise unchanged policy decision appear significantly more hawkish. A 10–2 vote, he argued, would carry greater significance than minor changes in the wording of the policy statement.

He added that markets do not need to see a majority supporting a July hike to conclude that September remains a live meeting. Visible dissent, combined with a hawkish tone during the Chair's press conference, could be enough to strengthen expectations for a September increase.

Shuraim also expects the July meeting to feature divided voting should rates remain unchanged, estimating that between two and three members could oppose the decision.

Among the policymakers who may favor a rate increase, he named Lorie Logan, Beth Hammack, Neel Kashkari, and Lisa Cook, although he believes the number of actual dissenters will likely be limited to two or three.

He said dissent would be consistent with markets' growing expectations of tighter monetary policy in the coming months. It would be difficult, he argued, for the committee to present a unanimous vote in favor of holding rates while markets increasingly anticipate a September hike.

A 10–2 or 9–3 vote in favor of leaving rates unchanged would therefore indicate that a meaningful faction within the committee already considers higher rates necessary to contain inflation.

Warsh's Approach Increases Market Sensitivity

Azzam said that Kevin Warsh's approach has reintroduced an element of surprise to Federal Reserve meetings, making it more difficult for markets to anticipate policy decisions based on official remarks and forward guidance.

He explained that Warsh has deliberately reduced advance signaling, shortened the monetary policy statement, and refrained from providing a clear outlook for interest rates. As a result, investors are increasingly reassessing each meeting based on incoming economic data, geopolitical developments, and movements in energy prices.

The market-implied probability of a July rate hike rose from around 10% following the inflation data to nearly 30% ahead of the meeting, reflecting heightened market sensitivity to new developments, particularly changes in oil prices and tensions in the Middle East, according to the analyst.

While this approach gives the Federal Reserve greater flexibility in managing monetary policy, it also increases uncertainty and heightens volatility across the US dollar, bonds, gold, and equity markets. Investors are now scrutinizing every word of the policy statement, every dissenting vote, and every change in the Fed's assessment of inflation.

Shuraim also described the July meeting as the beginning of a new era for the Federal Reserve—one characterized by limited forward guidance and fewer public statements and press conferences. This, he said, makes it harder for markets to understand the central bank's reaction function or determine which economic indicators policymakers will prioritize when making decisions.

He noted that, over recent years, markets have closely monitored indicators such as the Personal Consumption Expenditures (PCE) Price Index, Core PCE, and the Consumer Price Index (CPI). However, Warsh is seeking to reshape how the Federal Reserve assesses inflation and evaluates its interaction with labor market conditions and overall economic activity.

According to Shuraim, Warsh has established specialized working groups focused on issues including inflation and AI-driven productivity, developments that could influence how inflation is measured, how economic data are interpreted, how interest-rate decisions are made, and how the Fed communicates with markets.

He said the Federal Reserve is effectively undergoing a comprehensive reset in the way it operates and expects elevated uncertainty to persist across many upcoming meetings because of the reduction in forward guidance and changes in the institution's data-dependent decision-making framework.

As a result, markets are likely to become increasingly sensitive to every policy statement, speech, and press conference delivered by the Fed Chair, potentially leading to greater volatility before, during, and after policy meetings.

Policy Statement Under Close Scrutiny

Shuraim said that one of the key aspects to watch at the July meeting will be the wording of the policy statement. He expects it to be shorter than previous statements and to reflect meaningful changes in how the Federal Reserve presents its policy stance.

Markets will be watching closely to see whether the statement reaffirms both sides of the Fed's dual mandate—price stability and maximum employment—or continues to place greater emphasis on inflation and price stability, according to the analyst.

He noted that the previous statement focused heavily on price stability, meaning that any renewed emphasis on employment would be viewed as an important indication of shifting policy priorities.

Given the absence of forward guidance, interpreting the statement has become even more important, as investors search for clues about how the Federal Reserve will respond to future developments in inflation, the labor market, and economic activity.

Azzam expects the statement to acknowledge that inflation remains elevated, economic activity continues to be resilient, and uncertainty surrounding energy markets and global trade remains high. He also believes the Fed will avoid language suggesting that its next move is likely to be a rate cut.

A Rate Hike to Be the Biggest Surprise

According to Azzam, the most significant surprise would be a 25-basis-point rate increase at the July meeting, accompanied by Warsh signaling that the move is intended to counter broadening inflationary pressures and that the Committee stands ready to tighten policy further if price growth remains elevated.

“Markets have already priced in part of the probability of a rate increase but have not fully priced in the possibility of the start of a new monetary tightening cycle. Consequently, an unexpected hike would have a particularly strong market impact,” he said.

Shuraim believes the potential surprise extends beyond the rate decision itself. In his view, the greater shock could come if Warsh shifts from hawkish rhetoric to hawkish action by voting in favor of raising interest rates.

He explained that, based on Warsh's approach so far, the Fed Chair has avoided issuing forward guidance or making statements that could have a significant and immediate impact on financial markets. However, investors continue to question how willing he is to adopt a more aggressive monetary policy stance to combat inflation.

Shuraim noted that newly appointed Federal Reserve Chairs often adopt a more hawkish tone early in their tenure to reinforce the central bank's credibility and demonstrate its commitment to fighting inflation. The July meeting, he said, could provide the first clear indication of whether Warsh intends to follow that pattern.

A vote by Warsh in favor of a rate increase would therefore send a powerful signal that his commitment to combating inflation extends beyond rhetoric and into actual policy decisions, prompting markets to reassess the future trajectory of US monetary policy.

A Potential Surprise Between the Decision and the Press Conference

Shuraim suggested that the most intriguing scenario could unfold in the period between the announcement of the interest-rate decision and Warsh's subsequent press conference, particularly if markets experience sharp movements immediately following the decision.

“Should the decision or the voting outcome trigger significant declines in US equities and broader financial markets, Warsh may feel compelled to calm investors through his remarks, despite his stated preference for limiting forward guidance,” said the analyst.

He said that providing explicit policy signals during the press conference to stabilize market conditions would itself constitute a surprise, given Warsh's consistent effort to avoid giving markets a clear roadmap for monetary policy.

Nevertheless, Shuraim considers this only a possibility and does not expect any major surprises beyond it, maintaining that keeping interest rates unchanged remains the most likely outcome of the meeting.

The July Meeting Opens a New Chapter for the Federal Reserve

Shuraim concluded that the significance of the July meeting extends well beyond the interest-rate decision itself, as it represents an early test of how the Federal Reserve will operate under Warsh's leadership, as markets continue to determine which data and indicators the central bank will assign the greatest weight when formulating policy.

This shift, combined with reduced communication and the near absence of forward guidance, means future Fed meetings are likely to be characterized by a substantially higher degree of uncertainty than markets have become accustomed to over recent years, he added.

As a result, investors will increasingly have to rely on incoming economic data and assess each meeting on its own merits, rather than attempting to anticipate policy decisions through policymakers' speeches or advance guidance, according to Shuraim.

For his part, Azzam reaffirmed that the base-case scenario remains fixing interest rates in July. However, he stressed that markets will place greater emphasis on the tone of the policy statement, the voting outcome, and any signals Warsh provides regarding the September meeting, as these will be the key factors shaping expectations for the future direction of US monetary policy.