Investing.com — The Federal Reserve is likely to leave interest rates unchanged at its July policy meeting despite rising oil prices, with Citi arguing that markets are overstating the chances of an immediate rate hike as recent inflation and labor market data point to easing price pressures. <\/p>\n
Markets have priced in roughly a 30% probability of a rate increase following the recent jump in crude oil prices. However, Citi expects the Fed to keep rates steady, arguing that softer-than-expected June core inflation and slowing payroll growth make it difficult to justify tightening policy after officials opted not to raise rates in June. <\/p>\n
Markets are divided ahead of Wednesday’s Federal Reserve decision as higher oil prices have fueled speculation of a rate hike, but Citi believes recent signs of cooling inflation and moderating labor market conditions will keep policymakers on hold. The bank expects any decision to leave rates unchanged, despite hawkish dissents from some officials, to be interpreted as dovish by investors, lowering Treasury yields and weakening the U.S. dollar. <\/p>\n
The bank expects multiple dissents from policymakers favoring higher rates, with Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan likely to vote for a hike. More than two dissenting votes, Citi said, would be interpreted as a stronger hawkish signal. <\/p>\n
Citi believes leaving rates unchanged would likely be viewed as a dovish outcome, pushing Treasury yields and the U.S. dollar lower. It said the majority of policymakers are likely to conclude that the economy is not overheating, citing moderating job growth, a sharp drop in labor force participation, and June core CPI data that was consistent with pre-pandemic inflation trends. <\/p>\n
While some investors expect Chair Kevin Warsh to respond to higher oil prices with a surprise rate increase to reinforce the Fed’s inflation-fighting credibility, Citi argues such a move would be inconsistent with falling market-based inflation expectations and Warsh’s previous comments suggesting supply-driven price shocks should not automatically trigger tighter monetary policy. <\/p>\n
The bank also expects Warsh to avoid providing forward guidance at his post-meeting press conference, maintaining his preference for offering little indication of the Fed’s future policy path. Citi said any repetition of his recent remarks downplaying AI-driven inflation or emphasizing different measures of inflation could be interpreted as marginally dovish. <\/p>\n
Looking beyond July, Citi expects another few months of softer labor market data and subdued inflation to eliminate expectations for further rate hikes and pave the way for the Fed to resume rate cuts as early as October. <\/p>\n
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