Federal Reserve: Hike pricing questioned – TD Securities

TD Securities’ Gennadiy Goldberg and Molly Brooks note that market pricing for Fed hikes has risen alongside higher Oil prices and US-Iran tensions, but they judge a July move as unlikely. They see significant risk of rate hikes later in 2026, yet consider current July FOMC pricing excessive and highlight a receive July OIS position.

Market mispricing July Fed decision

"If current pricing persists into next week's FOMC decision, it would be the second-largest deviation between market pricing and actual Fed action in the past decade. While this may be driven in part by the Fed's reluctance to provide forward guidance, we believe the pricing for July remains excessive and maintain a receive July OIS position in our model portfolio."

"Pricing for rate hikes moved alongside oil heading into the June CPI report, but the correlation temporarily broke, with markets becoming less concerned about energy passing through to core following weaker CPI and PPI readings. However, the longer energy shocks persist, the more markets will become worried about the Fed reacting."

"Fed and growth expectations have been the primary drivers of 10y Treasury yields in recent months, with rates hovering around key levels. Markets seem to be holding in the 4.66-4.69% area for now, but if a break occurs, the next key resistance is likely around 4.80/81% and then 5.00%."

"The pricing for a July Fed rate hike has moved from a low of just 2bp a few days ago to 8bp. While we believe there is significant risk of the Fed deciding to hike rates later this year, the pricing for next week's meeting looks extreme as the Fed likely wants to observe the path of core inflation over the next several months before making a decision on hikes."