Fed Holds Rates Steady, But Hike Odds Rise on Oil-Driven Inflation

The Federal Reserve is expected to keep interest rates unchanged at its upcoming meeting in July. According to UOB strategists, the Fed Funds Target Rate will remain at 3.50%-3.75% for now.

This extended pause is part of a base case that sees easing only in the second and fourth quarters of 2027, once transitory inflation fades. However, with oil-driven inflation risks rising, markets are pricing in a higher probability of a rate hike.

The recent surge in crude oil prices has led to a significant increase in the likelihood of a 25bps hike at the July Federal Open Market Committee (FOMC) meeting. Markets now price a meaningful 35.8% probability of this occurrence, up from previous expectations.