No July hike? Why the Fed has time on its side despite oil surge

Bond trader Ed Bradford on Wednesday highlighted a compelling discrepancy between crude oil (USO) prices and inflation expectations that could play a key role in the Federal Reserve's upcoming interest rate decision, with this current dynamic suggesting the central bank will likely hold off on raising rates this July.

Bradford shared a two-panel chart on social media, comparing the 1-year USD inflation swap to generic first crude oil futures (CL1:COM). He observed that the 1-year inflation swap currently sits at 2.03, remaining notably subdued even as crude oil prices have surged back to the $87 per barrel mark.

The last time oil reached $87, the inflation swap was trading well north of 2.80, Bradford pointed out. This significant divergence indicates that the market is treating the recent energy price spike differently than previous cycles. Bradford argues that the "one-time price adjustment has washed thru," a development that buys the Federal Reserve valuable time and leads him to predict there will be no rate hike in July.

The broader market consensus largely aligns with Bradford's view, with the base case remaining for another hold. However, some lingering tightening risks are still being priced in by traders.

Currently, fed funds futures see a 26% chance the Fed hikes by 25 bps to a 3.75%-4.0% target range, though this is down from 36% a month ago. Still, there is a 56% chance the Fed hikes at the September meeting.

On prediction marketplace Kalshi, those odds stand at a lower 17%, a figure that has remained roughly unchanged from a month ago.