Federal Reserve Set to Hold Rates as Inflation Risks Loom

Commerzbank's Bernd Weidensteiner expects the Federal Reserve to keep interest rates unchanged at its upcoming meeting, citing favorable inflation trends. However, he notes that rising oil prices pose a risk of second-round effects on inflation, potentially delaying headline inflation's decline during the summer months.

Weidensteiner's baseline assumption is that core Personal Consumption Expenditures (PCE) Price Index will slow toward a 2% path, allowing the Fed to avoid further tightening and possibly start cutting rates from mid-2027. This would mean that even if inflation remains stable, higher oil prices could still pose upside inflation risks.

Under current conditions, Weidensteiner estimates that core inflation won't reach the 2% mark until spring 2027, with a monthly increase averaging 0.35%. The recent escalation in the Persian Gulf has led to another noticeable rise in oil prices, which could further complicate the Fed's decisions.

Weidensteiner believes that the Fed will likely keep its key interest rates unchanged again at its meeting next week, as it seeks more clarity on inflation trends before considering a rate hike. This would mean that the target range for its policy rate remains at 3.50%, 3.75%.