Fed Holds Key as Oil Prices Rekindle Inflation Fears

The US Federal Reserve (Fed) is set to make its interest rate decision on Wednesday, and markets are anticipating a hold, but there's a growing possibility of a hike. According to the CME FedWatch Tool, there's nearly a 30% probability of a 25 basis points interest rate increase.

Rising crude oil prices have sparked concerns about inflation, which could prompt the Fed to tighten monetary policy. Oil prices climbed above $90 a barrel in July after falling by about 35% from May to June.

Strategists at OCBC note that the probability of a July rate hike has rebounded to 35% as higher oil prices reignited inflation concerns. However, they caution that a hold accompanied by hawkish guidance could push expected rate hikes further out the curve without altering the roughly 55bp of cumulative tightening priced in through mid-2027.