Fed Meeting Shaken By Oil Price Surge

The Federal Reserve's July meeting was influenced by the conflict in the Middle East, causing oil prices to rise. Despite this, inflation compensation moved little in response to higher oil prices, and nominal rates rose largely on expectations of policy rate increases.

Nominal Treasury yields rose 25 to 30 basis points, driven by corresponding increases in real interest rates. Market pricing indicated a one-in-three chance of an increase in the target range for the federal funds rate at the July meeting.

The median respondent to the Desk survey expected no action at the July FOMC meeting as a base case, but market participants priced in about a 25% chance of a hike by September and another one by the end of the first quarter next year.