Fed Expected to Keep Rates Unchanged Amid Oil Price Volatility

The Federal Reserve is expected to keep interest rates unchanged at its upcoming meeting on July 28-29, according to ING Think. This decision comes after June's inflation data showed lower-than-expected readings and softer labor market figures.

Despite the recent surge in oil prices leading markets to increase their expectations of a rate hike, the Fed is likely to maintain its current policy stance. The spike in oil prices was responsible for a 20bp jump in cumulative Fed rate hikes by the first quarter of 2027, but ING Think argues that this may not necessarily translate to higher inflation.

The publication points out that gasoline prices did not fall in line with oil price declines, and that current oil prices are historically consistent with gasoline prices of just above $4/gallon. This suggests that the energy situation does not guarantee higher inflation.

ING Think also notes that underlying price pressures are easing due to cooling housing costs, weaker wage growth, and tariff refunds improving corporate cash flow. However, a return to dialogue in the Middle East and a de-escalation of tensions would be necessary to shift market pricing and lead to lower energy prices.