Federal Reserve Governor Christopher Waller delivered a sharply hawkish speech on July 13, warning that interest rate hikes may be necessary in the near term if core inflation remains elevated. This marked a significant shift from his previous dovish stance. The market reacted immediately with July rate hike probability surging from 22% to 39%. The 2-year Treasury yield rose 15 basis points to 4.75%, the highest since early 2025. The dollar strengthened broadly against major currencies. EUR/USD fell below 1.0820. USD/JPY rebounded above 159.50.
What This Means
Waller’s shift reflects growing concern within the Fed that the battle against inflation is not yet won. Core inflation remains above 3% annualized, and the labor market continues to show strength with wage growth at 4.2%. The addition of geopolitical risk from Middle East tensions adds further complexity. The key catalyst this week is the June CPI report, which will determine whether the July rate hike probability moves above 50%.