Traders see 50% chance that Warsh Fed hikes rates this month

By Greg Ritchie and Cameron Fozi

(Bloomberg) — Traders see a U.S. interest-rate hike later this month as a coin toss, with a renewed rise in oil prices and hawkish commentary from Federal Reserve officials auguring a swift move to tame inflation.

Money-market pricing on Monday suggests traders boosted their wagers for a July quarter-point rate increase after a spate of fresh U.S. strikes on Iran. The pricing reflected a nearly 50% possibility of a hike, from less than 40% earlier in the session, as Fed Governor Christopher Waller said policymakers may need to raise rates if underlying inflation continues to signal broad price pressures.

Two-year Treasury yields, which are most sensitive to changes in Fed policy expectations, rose as much as seven basis points to 4.28%, the highest since February 2025. The five-year rate hit a similar peak of 4.37%, while the benchmark 10-year yield reached as high as 4.62% after gaining six basis points, the highest since May.

The advance in Treasury yields comes ahead of this week’s U.S. consumer and producer price data, as well as testimony from Fed Chairman Kevin Warsh. Should Tuesday’s core inflation print come in hot, Waller said officials would need to consider tightening monetary policy in the near term.

“Markets pushed up near-term rate hike expectations to Waller’s message,” said Molly Brooks, U.S. rates strategist at TD Securities. “This makes tomorrow’s CPI print even more important and therefore more volatile, with risks to further bear flattening if we get a hotter print.”

The surge in short-term rates reflects growing expectations that the Fed will need to raise rates sooner to rein in price pressures from the rebound in global energy prices and signs of a resilient U.S. economy.

U.S. data on CPI and producer prices will be a key focus this week as they will be the final inflation prints before the Fed’s next meeting. Both headline and core CPI due on Tuesday are likely to have eased slightly in June, though both are forecast to remain well above the Fed’s 2% target, according to a Bloomberg survey of economists.

On the geopolitical front, Brent crude jumped as much as 9.9% on the day after the U.S. and Iran exchanged fresh strikes, with the two sides offering conflicting statements on whether the Strait of Hormuz remains open. The bond moves extended after U.S. President Donald Trump said the U.S. is “reinstating” a blockade of Iranian ships.

What Bloomberg Strategists say…

“Waller defined the Fed’s reaction function Monday in a move that reduced the Fed uncertainty premium embedded in Treasury yields even as his message was hawkish.”

— Alyce Andres, Macro Strategist, Markets Live

Warsh will this week also make his first congressional appearance since taking the helm after pledging to scale back forward guidance on the rate outlook. Despite markets pricing an increased risk of hikes, many investors’ base case remains for no monetary tightening this year.

“Investors remain focused on the July 29 FOMC meeting as potentially the timing for Warsh’s first rate hike,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “Tuesday’s combination of CPI and Warsh will surely sway the probability in one direction or another.”

–With assistance from Matthew Burgess, Naomi Tajitsu, George Nixon, Anna Edwards and Masaki Kondo.

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