Federal Reserve Governor Christopher Waller’s recent speech in Frankfurt has heightened market expectations for a potential interest rate hike. Waller indicated that the next move by the Federal Reserve could be a rate hike, citing inflation risks linked to ongoing geopolitical tensions involving Iran. This marks a shift from the previous stance where rate cuts were more anticipated. As a result, the probability of a 25-basis-point hike by October 2026 has increased significantly, with market pricing now reflecting a stronger likelihood of at least one rate hike this year. The Federal Open Market Committee (FOMC) has already adjusted its language, removing any easing bias, and several officials now expect a rate increase by the end of 2026.
Key Takeaways
Waller’s speech appears to have increased the market’s expectation of a rate hike by September 2026, with odds rising to 61%.
The probability of a rate hike by the July 2026 meeting has also risen, although it remains lower than later in the year.
Markets suggest a decreased likelihood of no change in interest rates after the July meeting, with odds falling to 64%.
