US Economics: The Daily Update - Is a rate hike 30% likely?

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US Economics: The Daily Update - Is a rate hike 30% likely?

US Economics

23 July 2026 Citi Research

Markets are pricing about 30% probability of a rate hike next week, despite

economists (and investors we speak with) nearly universally expecting the Fed to

stay on hold. To some extent the probability of a hike priced for next week simply

reflects the fundamental skew in the distribution of outcomes – policymakers are

not going to cut rates meaning the skew of risk is toward higher rates.

But does the marginal investor really ascribe a 30% probability to a hike next week?

Probably not. Markets are instead building in a “risk-premium” as compensation

for the potential that officials do something surprising at the meeting. Historically,

this risk premium has been minimal (e.g. 1-2bp), but with less clear Fed guidance

uncertainty has increased, and investors are demanding to be compensated for

bearing this risk.

That higher yields represent a risk premium, over and above subjective probabilities

of rate hikes, also helps make sense of interest rates further out the curve. If the

FOMC does begin hiking at some future meeting (unexpectedly), it would likely

reflect the beginning of a hiking cycle with rates terminating meaningfully higher.

This dynamic, together with increased compensation for bearing uncertainty,

probably accounts for the market pricing over 50bp of hikes by March, even if this

is not most investors “base case.”

Key Data Today:

8:30 AM

- For the week of July 18, we expect initial claims to fall somewhat lower to

203k

- We expect continuing claims to edge somewhat lower to 1801k from

1805k.

Figure 1. Market is pricing in a hike this year Figure 2. Oil prices have been volatile recently