Despite a surge in international oil prices raising the possibility of an interest rate hike by the Federal Reserve, analysts suggest that the Federal Open Market Committee (FOMC) is likely to keep rates steady in July.
According to Investing.com and TheStreet on July 26, the Fed will meet on July 28-29 to decide on interest rates. As of 4 p.m. Korean time on July 27, the CME FedWatch Tool, which tracks market expectations for Fed rate changes, indicated a 68.5% chance of maintaining the current rate, while a 0.25 percentage point increase was seen at 31.5%.
Just a week ago, the likelihood of a rate freeze was nearly 90%. However, renewed military tensions surrounding Iran and rising oil prices quickly shifted expectations for a rate hike. Nonetheless, following the cessation of hostilities between the U.S. and Iran over the weekend, concerns about escalation have eased, and international oil prices have shown a significant decline.
Citi forecasts that the Fed will maintain the current interest rate of 3.5-3.75% during this FOMC meeting, despite the rise in oil prices. They noted that core inflation in June was lower than expected and that employment growth has also slowed, suggesting a strong likelihood of a rate freeze.
However, some committee members, including Cleveland Fed President Loretta Mester and Dallas Fed President Lorie Logan, are expected to advocate for a rate increase. Citi interprets that if more than three votes are cast in favor of a hike, it could signal a hawkish stance, but the decision to freeze rates is likely to be viewed as dovish in financial markets. In such a scenario, U.S. Treasury yields may decline, and the dollar could weaken.
Additionally, Citi assessed that the slowdown in employment growth, the drop in labor force participation, and the core Consumer Price Index (CPI) for June, which is nearing pre-pandemic trends, indicate that the U.S. economy is not overheating.
Goldman Sachs raised questions about the effectiveness of limited rate hikes rather than directly predicting the outcome of this meeting. David Mericle, Goldman Sachs' chief U.S. economist, stated that while one or two small rate increases could demonstrate the Fed's commitment to price stability, their actual impact on reducing inflation is likely to be minimal.
He explained that much of the recent inflation is driven by supply shocks, such as tariffs and rising energy prices due to the conflict in Iran, rather than demand overheating, making it difficult to curb inflation with limited rate hikes.
Goldman Sachs analyzed that the increases in tariffs, energy prices from the Iran conflict, and measurement errors related to artificial intelligence (AI) account for most of the excess over the 2% target in the core Personal Consumption Expenditures (PCE) price index. They estimate that these factors alone could explain the excess in the core CPI.
Goldman Sachs noted, "A key lesson from recent years is that supply shocks have a significant impact on inflation, while changes in the labor market and idle resources within the economy have a relatively limited effect on prices. Therefore, it is challenging to lower inflation with only the limited rate hikes anticipated by the bond market."
Markets are reflecting a cumulative probability of about 79% for at least one 0.25 percentage point increase before the September FOMC. However, Citi predicts that if employment and inflation indicators continue to weaken in the coming months, expectations for a rate hike will diminish, and the Fed may resume rate cuts as early as October.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.