US Stock Market: Wall Street divided on Fed as rising crude prices boost rate hike expectations

The US Federal Reserve's policy meeting this week has become increasingly difficult to predict, with a growing number of major brokerages warning that policymakers could opt for a hike in interest rates as rising oil prices and escalating geopolitical tensions threaten to reignite inflationary pressures.

According to a Reuters report, while most Wall Street firms still expect the Federal Reserve to leave interest rates unchanged, the sharp jump in crude oil prices and renewed conflict in the Middle East have significantly increased the possibility of a surprise rate increase.

Oil rally clouds inflation outlook

Brent crude climbed to $100 a barrel last week, intensifying concerns that higher energy costs could fuel inflation at a time when price pressures remain above the Federal Reserve's 2% target.


Reuters reported that the spike in oil prices has complicated the policy outlook, with some analysts arguing that the central bank may need to maintain a hawkish stance to preserve its credibility in fighting inflation.

Brokerages divided on Fed's next move

Most major brokerages continue to view no rate changes this year as their base-case scenario. However, BofA Global Research and Deutsche Bank stand out with more aggressive forecasts.

BofA expects the Federal Reserve to deliver three rate hikes beginning in September, while Deutsche Bank forecasts two increases over the same period.

Several analysts believe the July meeting has become a genuine close call, given the combination of elevated oil prices, persistent inflation concerns and limited forward guidance from Federal Reserve Chair Kevin Warsh.

Credibility versus economic data

Some market participants believe the Federal Reserve could choose to raise rates this week to reinforce its commitment to bringing inflation under control, even if economic data alone may not fully justify such a move.

However, Citigroup has maintained a more dovish stance, arguing that a credibility-driven rate hike would be difficult to defend because market-based measures of inflation expectations have remained subdued, suggesting investors are not overly concerned about persistent inflation.

Markets increase odds of July rate hike

Financial markets have sharply raised expectations for a policy move at this week's meeting.

Reuters reported that traders now see roughly a 32% probability of a Federal Reserve rate hike, up from around 10% just two weeks ago, reflecting growing uncertainty surrounding the central bank's decision.

The Federal Reserve's policy announcement is expected to be closely watched by investors worldwide, with markets looking for clues on how policymakers balance inflation risks against the broader economic outlook amid heightened geopolitical uncertainty.