Wall Street Rate Hike Bets Heat Up as Hedging Demand Hits Record
Claire Weston
Ahead of the Fed's July decision, swaps price roughly a one-in-three chance of a 25-bp hike while open interest in August fed-funds futures hit a record 967,136 contracts — Wall Street is bracing for a possible surprise move in the Warsh era's first real test.
What is the market actually pricing?
Swap markets put the probability of a 25-basis-point July hike at roughly one in three.
Open interest in August fed-funds futures rose Monday to 967,136 contracts, surpassing the previous all-time high set by the October 2024 contract. This means → demand for hedging a surprise hike has never been higher on record.
In plain terms = the market isn't sure the Fed will hike, but the cost of insurance against "what if it does" has hit an all-time peak — that hedging intensity alone tells you how extreme the uncertainty is.
Why do some believe July is the right time?
Citadel Securities macro strategy head Frank Flight switched his base case to a July hike this week, calling it a move that would "end the era of forward guidance for good."
His logic: what matters is not a single rate change but the message the entire policy path sends — action is far more credible than spoken guidance.
Wrightson ICAP chief economist Lou Crandall said the Fed has "no good reason not to hike." PGIM global bond head Robert Tipp argued the market may be underpricing a July move, warning: "Delay now, and you raise the odds of a 50-bp hike in September."
Where does the 50-basis-point call come from?
Veteran bond-market commentator Harley Bassman urged the Fed to "rip off the Band-Aid" and hike 50 basis points outright.
His case has two layers: bolster the Fed's inflation-fighting credibility while resisting President Trump's pressure to cut rates.
Bassman wrote on his Convexity Maven site: "A 50-bp hike says there's a new sheriff in town — one the president doesn't control." This reflects a strand of thinking that now ties rate decisions directly to the Fed's independence question.
Why does Warsh's unpredictability make everyone nervous?
Fed Chair Kevin Warsh has explicitly rejected forward guidance — the practice of signaling rate moves in advance — since taking office, refusing to tip the market off.
UBS chief U.S. economist Jonathan Pingle said his uncertainty about this decision is the highest in nearly twenty years, the last comparable moment being when Ben Bernanke first took the chair.
In plain terms = markets used to know the outcome before the meeting; now they genuinely don't — Warsh is deliberately withholding signals, and he himself may cast the decisive vote.
What scenarios is the market positioning for?
Bank of America's strategy team expects the Fed to hold rates this time, but forecasts dissenting votes from Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack.
BofA rates strategy head Mark Cabana said: "The market is pricing a very real hike risk" — and "if the market doesn't rule it out, neither do we."
BMO Capital Markets rates strategy head Ian Lyngen noted that since 2015, traders' average prediction error on the eve of a Fed decision has been just 2.4 basis points — the current uncertainty means "the immediate reaction after the FOMC statement will be sharper than usual."
What macro forces are driving this?
The recent repricing in rates is powered by two forces: energy prices rebounding on a renewed escalation in U.S.–Iran tensions, and persistent strength in the labor market.
Markets have now fully priced in a 25-bp hike before September and nearly 50 bp of cumulative hikes by March next year.
This means → even if July passes without a move, the consensus already treats a hike as inevitable within months — the debate is no longer "whether" but "when and how much."
Content is for reference only, not financial advice.