Brokerages See July Fed Decision as Close Call Amid Oil Price Surge

A growing number of major brokerages believe that this week's Federal Reserve meeting is a close call, with some forecasting a rate hike. The surge in oil prices and escalating tensions in the Middle East have raised concerns about inflation, which has consistently run above the Fed's 2% annual target. Brent crude hit $100 a barrel last week, leading strategists at BofA to say that 'the spike in oil prices has made it a close call' for policymakers.

Most brokerages expect the Fed to keep rates unchanged this year as their base case, but some are forecasting rate hikes starting in September. Strategists at UBS Global Research said they would not be surprised if the Fed raised rates 'to demonstrate their inflation-fighting resolve,' and that Fed Chair Warsh's influence would likely be a deciding factor.

However, Citigroup argued that a credibility-driven rate hike would be difficult to justify, given that market-based inflation expectations have fallen to low levels. Market pricing shows traders attaching a 32% chance of a Fed hike this week, up from around 10% just two weeks ago.