Fed's July Rate Decision: Straits of Hormuz Tensions and Rising Energy Prices Loom

The Federal Reserve is now in a position where it may need to hike interest rates at its July meeting. According to CME's FedWatch tool, there's a 46.5% chance of a 0.25% increase on July 29, up from 34% on Sunday. Kalshi's prediction market shows a 36% likelihood of a hike, reflecting growing market expectations. The U.S. reinstatement of the blockade on Iranian ports near the Strait of Hormuz, along with a 20% toll on cargo passing through, has sent oil prices surging over 5% to above $75 per barrel. Federal Reserve Governor Christopher Waller warned against repeating the mistakes of 2021-2022, where the Fed waited too long to raise rates amid inflation. However, with June inflation expected to be 3.8% (down from May's 4.2%), and the potential for further oil price spikes, the Fed may be forced to adopt a more hawkish stance. Barclays Research also noted that AI-driven price hikes are exacerbating inflation concerns. The July 29 decision will be closely watched by global markets.