Oil-Driven Inflation Risks Send Fed Hike Odds Soaring

The Federal Reserve is expected to keep interest rates steady at its July meeting, according to strategists from UOB. The Fed Funds Target Rate (FFTR) is likely to remain between 3.50% and 3.75%, with a base case of an extended pause through 2026 before easing in 2Q and 4Q 2027.

This outlook assumes that transitory inflation will fade, allowing the Fed to resume its easing policy. However, rising oil prices have led markets to price in a significant probability of a rate hike, with a 35.8% chance of a 25bps increase at the July FOMC meeting.