Futures markets are now pricing an 80% probability that the Federal Reserve raises rates in December, up from 73% a week earlier. The next actual decision comes far sooner: the FOMC meets July 28 and 29, eight days from today, with no press conference forecast update scheduled and the federal funds rate sitting at 3.50% to 3.75%, unchanged since December 2025.
The Bank of Canada is not moving in the same direction. Governor Tiff Macklem held the overnight rate at 2.25% on July 15 for a sixth consecutive meeting, the endpoint of 275 basis points of cuts delivered across nine decisions since June 2024. The two central banks are not simply on different schedules. Their underlying data are telling different stories.
What Is Actually Driving the US Repricing
The mechanism is energy, transmitted through gasoline prices. US pump prices moved back to an average of $4 a gallon this week as the US and Iran exchanged further strikes, and that pass through has been enough to shift Federal Reserve rhetoric. Cleveland Fed President Beth Hammack has joined a growing list of officials, including Dallas Fed President Lorie Logan and Vice Chair Philip Jefferson, warning that further rate hikes may be needed to contain inflation. Chair Kevin Warsh has himself said the Fed has no tolerance for persistently elevated inflation, a stance that predates the current escalation but leaves little room to look past an energy driven inflation print.
None of this has produced an actual rate move in 2026. The FOMC has held at every meeting so far this year. What has changed is the market's view of the odds on the next one, which is a repricing of expectations, not yet a change in policy.
Why Canada's Data Argue the Other Way
Canada's June CPI came in at 2.8%, down from 3.2% in May, and the Bank's preferred core measures, the trimmed mean and median, fell to their lowest levels in more than five years. Macklem has been explicit that the Bank is watching for oil price effects to spill over into broader inflation and has said plainly it will not let higher oil prices become persistent inflation. The data so far show the opposite of that risk materialising.
The Bank's own framing after the July 15 decision cited higher oil prices tied to the Middle East conflict as a headwind alongside a Canadian economy showing clear signs of resuming growth. That is a hold built on a stable domestic inflation trend, not a defensive hold against an accelerating one. It is a materially different setup than the one driving the US repricing.
What the July 29 Decision Actually Tests
A hold is the base case for July 29. The Fed has not moved once in 2026, and a meeting with no accompanying Summary of Economic Projections is not the venue central banks typically choose to signal a policy shift. The real test is the tone of the statement and Chair Warsh's press conference: whether the language leans into the hawkish repricing markets have already done, or pushes back against it.
Government of Canada five year yields eased 3 basis points to 3.15% on Monday even as US yields firmed on the odds shift, direct evidence that Canadian and US bond markets are already pricing different paths rather than waiting for July 29 to decide. That divergence is the mechanism worth watching over the next eight days, more than the headline probability number itself.
The Bank of Canada's rate path traces a steady descent from mid-2024 through late 2025, followed by six flat readings that now sit well below where the Fed funds rate has held since its own cuts stopped.
Nine cuts totalling 275 basis points brought the overnight rate from 4.75% to 2.25% between June 2024 and October 2025. The Fed funds midpoint has sat above the entire BoC path since the US central bank's own cutting cycle stalled in December 2025.
The Canadian Portfolio Read Through
A widening Bank of Canada to Fed policy gap typically pressures the Canadian dollar, and USD/CAD has already drifted toward the 1.40 to 1.41 range through the current escalation. For Canadian mortgage holders, the more relevant fact is that GoC yields, which set fixed mortgage pricing, have stayed anchored even as US rate expectations climb. A US hike, if it materialises in December, does not mechanically pull Canadian five year yields with it the way it would have in a period of tighter cross-border rate correlation.