FOMC Faces Tough Decision on Interest Rates Amid Oil Price Spike

Wall Street analysts expect the Federal Open Market Committee (FOMC) to hold interest rates steady or hike them at its upcoming meeting, citing rising oil prices and tensions in the Middle East. The FOMC, led by Chairman Kevin Warsh, will meet on Tuesday and Wednesday to discuss progress towards its targets of maximum employment and inflation at 2%. However, inflation stands at 3.5%, with fuel prices up 15.7% from a year ago.

Bank of America's chief U.S. economist Aditya Bhave wrote that the FOMC faces a difficult choice: not hiking could challenge its credibility on inflation, but raising rates would go against Warsh's framework of looking through supply shocks. The bank expects three 25bp hikes in September, October, and December.

Warsh's credibility is at stake as he has maintained his position despite President Trump's calls for lower interest rates. Analysts point out that other policymakers are becoming emboldened to speak more forcefully on the need for rate hikes, citing patience wearing thin with inflation above target.