Fed Decision Day Arrives With One Of The Most Divided Market Views Since The Pandemic: Report

• Data from the CME FedWatch tool shows that markets are pricing in a 70.6% probability of the Fed holding benchmark rates at the current level, while 29.4% chance of a rate hike. 
• “By comparison, nearly every Fed meeting since March 2020 has entered decision day with ~99% consensus,” The Kobeissi Letter said. 
• Meanwhile, Ned Davis Research (NDR) has argued that investors may be overlooking the odds of a surprise hike.

As the Federal Reserve’s July policy meeting decision looms on Wednesday, markets are split on the outcome. While a majority believe that the central bank will hold rates steady, some market participants are increasingly pricing in a rate hike. 

According to The Kobeissi Letter, this is one of the most divisive outlooks in recent times. In a post on X, it said, “Market expectations for tomorrow's Fed decision are among the most divided in recent history.”

Data from the CME FedWatch tool shows that markets are pricing in a 70.6% probability of the Fed holding benchmark rates at the current 3.50% to 3.75% level, while the remaining are looking at a 29.4% chance of a rate hike. 

“By comparison, nearly every Fed meeting since March 2020 has entered decision day with ~99% consensus,” The Kobeissi Letter said. However, the commentary service said that it expects the central bank to hold interest rates. 

Rationale Behind A Fed Hold Decision

The Kobeissi Letter said that while the Fed Chairman Kevin Warsh’s refusal to provide forward guidance has left markets with little direction ahead of the announcement, many indicators point to a hold in the July decision. 

“It's important to not forget that just months ago, President Trump said a ‘pre-condition’ for his next Fed Chair was a willingness to cut rates. And, the Iran War energy shock is likely to continue being labeled as a ‘temporary inflationary event’ rather than a structural one, the labor market is weak, and Americans are already struggling with high interest rates,” it said. 

“We think the Fed PAUSE continues tomorrow,” the firm concluded. This is in line with retail expectations. In a recent Stocktwits poll that asked investors what they think the Fed outcome is likely to be, 67% of the 16,900 who voted said the Fed would hold rates at current levels of 3.50% to 3.75%. Meanwhile, 18% voted for a 25-basis-point rate hike, while 15% said the central bank was likely to cut interest rates.

Wall Street’s Rate Hike Proponents

Meanwhile, Ned Davis Research (NDR) has argued that investors may be overlooking the odds of a surprise hike. In a report from Monday, the firm said the upcoming Federal Open Market Committee (FOMC) meeting is "underpriced for a rate hike," adding that the decision could be far closer than markets anticipate.

"Our view has been that the Fed will hike rates by September at the latest. That puts this week's meeting firmly in play," Joe Kalish, NDR's chief macro strategist, wrote in a note. 

Citadel Securities is also forecasting a surprise interest rate hike by the Federal Reserve in its latest policy. Frank Flight, head of macro strategy at Citadel Securities, reportedly said, "The market may once again be underestimating the extent of the hawkish shift at the Fed."

Meanwhile, among exchange-traded funds tracking benchmark indexes, the SPDR S&P 500 ETF (SPY) was up 0.23% at the time of writing amid ‘bearish’ sentiment. 

The Invesco QQQ Trust (QQQ) and the SPDR Dow Jones Industrial Average ETF Trust (DIA) were also up about 0.09% and 0.01% respectively. 

Retail sentiment on Stocktwits for QQQ was ‘bearish’ while it was ‘bullish’ for the DIA. 

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