Markets are now pricing a 25 percent probability of a 25 basis point Federal Reserve rate increase at the July 29 FOMC decision, according to the CME FedWatch Tool. A basis point is one-hundredth of a percentage point, so 25 basis points equals a quarter-point hike — the Fed's standard increment for adjusting interest rates.

The CME Group Market Focus page, citing the FedWatch tool as of July 7, put that 25% hike odds on the July 29 meeting. The tool itself was last updated July 21 at 7:00 PM CT. Until recently, the assumption across markets was that the Fed's rate path was on hold. MarketWatch flagged the rising hike likelihood in a July 22 headline, tying it directly to the intensifying Iran crisis.

The geopolitical backdrop has deteriorated sharply this month. Iran declared the Strait of Hormuz closed and expanded attacks on Gulf states following U.S. strikes, Reuters. The Strait of Hormuz is a narrow shipping channel at the mouth of the Persian Gulf through which roughly a fifth of global oil supply passes. The U.S. said it hit hundreds of Iranian targets after ship attacks. On July 16, Reuters reported that Trump ramped up U.S. air strikes on Iran as a ceasefire unraveled, Reuters. Secretary of State Marco Rubio said on July 22 that the U.S. remains willing to negotiate over the Iran crisis but that Tehran is not serious about talks, Reuters.

Crude oil has been the most visible channel for the shock. Trading Economics reported WTI (West Texas Intermediate, the U.S. benchmark for oil prices) at $87.10 per barrel on July 22, up 3.27% on the day. Over the prior month, crude had risen 18.98%, and over a longer comparison window it was up 33.49%, Trading Economics. Robinhood offered a prediction market for the July 22 WTI front-month settle with a threshold above $86.99, Robinhood. Polymarket ran a July WTI price event with "$85 or above" as the leading outcome at 100% probability as of June 25, Polymarket. The IEA, cited by Reuters on July 10, warned that the U.S.-Iran escalation in hostilities on July 7-8 could threaten the 2027 oil market surplus forecast, Reuters.

The Treasury market has absorbed the pressure with a steady upward drift in yields. The yield on a bond is the return an investor earns for holding it; when bond prices fall, yields rise. The 10-year Treasury closed at 4.60% on July 21 and then at 4.63% on July 22, according to YCharts. The Financial Times reported 4.66% on the same day, data as of 18:55 BST. For context, the 10-year finished at 4.55% on July 17, Advisor Perspectives. The long-term average for the 10-year Treasury rate sits at 4.25%, YCharts. That means the current yield is running roughly 38 to 41 basis points above the long-run norm, depending on which July 22 data point you anchor to.

The divergence between the two July 22 yield readings — 4.63% on YCharts versus 4.66% on FT — is a timing artifact rather than a genuine conflict. YCharts captures the settlement close; FT's figure is an intraday snapshot at 18:55 BST, which falls before the U.S. cash close. The settlement-level figure is the one that flows into end-of-day risk models.

The broader context here is the speed of the move. In the span of three trading sessions — July 17 through July 22 — the 10-year moved 8 basis points higher. That is not a disorderly sell-off, but it is a persistent grind in the direction that tightens financial conditions. For a Fed that has been data-dependent, the composition of the shock matters: this is not a demand-driven inflation impulse but a supply-side cost push channeled through energy prices and a term-premium adjustment. The term premium is the extra yield investors demand for holding longer-term bonds instead of rolling shorter ones. A classic stagflation signal — higher inflation expectations alongside deteriorating growth prospects — is exactly what Reuters flagged on July 21 when reporting that an Iran war stagflation premium was quietly mounting in financial markets.

The 25% hike odds deserve a calibrated read. A one-in-four probability is not a base case, and the FedWatch tool's implied probabilities can move sharply on positioning flows that do not necessarily reflect a consensus policy view. But the direction of travel is what concerns fixed-income desks: a month ago, the question was how many cuts were coming in 2026. Now the market is entertaining the possibility that the next move is up, not down. That is a meaningful regime shift in expectations, even if the outcome probability remains a minority view.

The binding constraint for the broader outlook is the oil price. If the Strait of Hormuz closure holds and crude extends beyond $87, the stagflation premium widens across breakevens (the market's implied inflation expectation, derived from the gap between nominal and inflation-protected Treasury yields), the belly of the curve, and credit spreads simultaneously. Rubio's July 22 statement that the U.S. is still willing to negotiate but Tehran is "not serious about talks" narrows the near-term de-escalation pathway. The IEA's warning about the 2027 surplus forecast adds a structural layer: if supply disruption persists, the cushion that markets expected for next year erodes, and the term structure of oil prices inverts further.