The Federal Reserve is widely expected to leave interest rates unchanged at its July meeting next week, but rising oil prices have sharply increased bets on a potential rate hike later this year. Oil prices topped $100 a barrel on Thursday, prompting investors to reassess their expectations. At the start of 2024, many economists anticipated at least one rate cut in 2026, but resurgent inflation tied to energy costs has shifted forecasts toward higher rates before year-end.
Fed Chair Kevin Warsh has pledged to return inflation to the Fed's 2% target, though he has offered few clues about his outlook. At the June meeting, nearly half of policymakers signaled support for a rate hike later this year. The probability of a rate hike at the upcoming July 29 meeting has risen to 38%, up from 12% a week earlier, according to the CME Group's FedWatch tool. However, the greater likelihood remains that the Fed will hold its benchmark rate steady in a range of 3.5% to 3.75%.
Investors are now pricing in an 82% likelihood of a rate hike in September, up from below 53% a week ago. Brent crude, the global benchmark, hit $100 a barrel amid escalating tensions between the U.S. and Iran. Gasoline prices in the U.S. reached $4 per gallon, the highest in over a month. Strong employment data, with jobless claims dropping to 187,000—the lowest since 1969—has bolstered the view that the Fed may prioritize inflation over labor market health.
Rising expectations for a rate hike may be pressuring the stock market, with the Dow Jones Industrial Average tumbling over 600 points in midday trading on Thursday. Analysts note that sustained high energy prices could accelerate inflation, complicating the Fed's decision-making process.