Ankara: Slowing annual inflation in the US in June reduced pressure for an interest rate hike at the Federal Reserve's meeting next week, while Middle East tensions increased policy uncertainty. The Federal Open Market Committee will hold the meeting on July 28 - 29. Recent data indicated easing inflationary pressures, but the renewed escalation of tensions in the Middle East and rising oil prices brought energy costs back to the forefront as a major risk factor.
According to Anadolu Agency, markets widely expect the Fed to keep its policy rate steady at next week's meeting. However, they did not rule out a rate hike because of rising energy prices and inflation remaining above target. Markets priced in a 64.2% probability that the Fed would keep the policy rate unchanged in the 3.5%-3.75% range, and a 35.8% probability of a rate hike, according to CME Group data. Statements by new Fed Chair Kevin Warsh emphasizing his commitment to restoring price stability after taking office, while providing limited forward guidance, also increased uncertainty.
Recent economic data released in the US were among the main factors supporting expectations that the Fed would keep rates steady. The Consumer Price Index fell 0.4% on a monthly basis in June, while it rose 3.5% annually, coming in below expectations, according to US Labor Department data. The index recorded its first monthly decline since May 2020. Energy costs dropped 5.7% in June after rising by 10.9% in March, 3.8% in April, and 3.9% in May. The decline in the energy index offset price increases of other items, including shelter and food, and became one of the main drivers of the monthly decline in the index. The energy index surged 15.7% year-on-year in June despite the monthly drop in energy prices.
Rising tensions in the Middle East and fluctuations in oil prices brought concerns about energy costs back to the agenda in the US. The price of Brent crude hit $100 per barrel last week, while the average price of gasoline in the US exceeded $4 per gallon for the first time since June. The national average price of gasoline rose to $4.10 per gallon as of July 24, according to the American Automobile Association.
"I expect the Fed to hold interest rates unchanged this year and into next," Mark Zandi, chief economist at Moody's Analytics, told Anadolu. "Inflation has likely peaked, inflation expectations appear well-anchored, and the job market is soft," he said, adding that much depended on how the Iran war plays out. Zandi believes that Trump and the Iranian regime would come to terms in the next few weeks, the Strait of Hormuz would slowly reopen and oil prices would end the year close to $80 per barrel, noting strong incentives for both parties to reach a more durable agreement.
"The latest CPI (Consumer Price Index) data give the Fed good reason to stay on hold, but little reason to relax," said Olu Sonola, the head of US economic research at Fitch Ratings. Sonola said that June CPI moderated and the labor market remained in good shape, while producer and import-price data continued to point to persistent inflation pressures. "With developments in the Middle East threatening to push energy costs higher again, we expect the Fed to leave rates unchanged next week and assess the trend through September," he said.
"I think the June CPI data, which indicated a slackening of inflation pressures, will be enough to keep the Fed on hold for the July meeting," said Steven Kamin, senior fellow at the American Enterprise Institute. Kamin stated that with the labor market apparently in something like an equilibrium, and with oil prices rising in response to renewed Middle East conflict, the 'chances were good that the Fed could hike in subsequent meetings.'
Nancy Vanden Houten, lead US economist at Oxford Economics, said her company did not expect the July meeting to change their outlook for the Fed, which was at odds with consensus. "We aren't looking for a rate hike but expect the FOMC to keep policy steady until September of next year, when we expect inflation will be low enough to warrant a rate cut," she said. Houten stated that Oxford did not expect Warsh to be any more or less hawkish than he had been recently.