Fed Expected to Hold Interest Rates as Oil Prices Create Uncertainty

The Federal Reserve is expected to keep interest rates unchanged at its two-day policy meeting on Wednesday. Economists say this decision comes despite a mix of economic data and rising oil prices, which have made the outlook less clear-cut.

ING Chief International Economist James Knightley believes the Fed will leave rates unchanged after the June Consumer Price Index came in below expectations and labor market data softened. Gregory Daco, chief economist at EY-Parthenon, also expects the Fed to be on hold for the rest of the year.

Economists at BofA expect a total of three 25-basis-point rate hikes this year, but say the surge in oil prices has made the July decision a close call. The firm stated, 'Our base case is that the Fed will stay on hold at 3.50%-3.75% in July. But the spike in oil prices has made it a close call. Not hiking could challenge the Fed's credibility on inflation. But raising rates would go against [Warsh’s] framework of looking through supply shocks.'

Data from the CME FedWatch tool shows there are 56.6% odds in favor of a 25 basis point rate hike for the first time in September, 47.5% in October, and 37.4% in December this year.