Odds of Federal Reserve Rate Hike Surge as Oil Prices Climb

• Investors are increasingly preparing for the Federal Reserve (Fed) to hike interest rates as oil prices climb.  According to CME’s FedWatch tool, Fed funds futures are pricing in a roughly 82% likelihood that the central bank raises borrowing costs at its September policy meeting, up from below 53% a week earlier.
• The Fed is still broadly expected to keep interest rates unchanged at the current 3.50%-3.75% range at its meeting next week. However, expectations of an earlier increase are also rising, with futures indicating a nearly 38% probability of a quarter-percentage-point hike, up from less than 12% a week ago.
• Thursday’s initial jobless claims data strengthened the view that the Fed can focus more on inflation, which could accelerate as energy prices climb, than on the health of the labour market. Initial jobless claims fell to 187,000 in the week ended July 18, the lowest level since 1969.
• Rising expectations for a rate increase, alongside higher oil prices and Treasury yields, added to downward pressure on the stock market. The two-year U.S. Treasury yield also rose about five basis points to 4.351%.
• Despite the shift in market expectations, economists’ outlook does not point to tighter monetary policy through 2026. According to financial data and analytics company FactSet, the consensus forecast remains that the Fed will not raise rates this year, while economists expect the central bank to lower borrowing costs by half a percentage point in 2027.

(Source: CNBC)