Citibank: Fed Moves to Keep Rates Steady Despite Oil Surge

SadaNews - Citibank has predicted that the Federal Reserve (the U.S. central bank) will keep interest rates unchanged in its upcoming meeting this week, despite rising oil prices, arguing that markets are overestimating the chances of a rate hike amid ongoing inflation slowdown and a sluggish labor market.

The bank noted that markets are currently pricing in a roughly 30% chance of a rate increase following the recent rise in crude oil prices, but the drop in core inflation during June, along with the slowdown in job growth, reduces the rationale for tightening monetary policy, especially after the Fed's decision to keep rates unchanged in its previous meeting.

Furthermore, the decision to maintain rates, even with objections from some members of the Open Market Committee, may be interpreted by investors as leaning towards monetary easing, which could push down U.S. Treasury yields and the dollar.

Citibank expects that both Beth Hammack, President of the Federal Reserve Bank of Cleveland, and Lorie Logan, President of the Federal Reserve Bank of Dallas, will vote in favor of raising rates. It pointed out that surpassing the number of opposing votes at this level will be an indicator of the growing pro-tightening sentiment within the committee.

The bank believes that most policymakers will conclude that the U.S. economy is not experiencing overheating, relying on the slowdown in job growth, the decline in labor force participation rates, and the ongoing core inflation data remaining close to the trends that were prevalent before the COVID-19 pandemic.

The bank also ruled out the possibility of Federal Reserve Chair Kevin Warsh making a surprise rate hike to bolster the bank's credibility in combating inflation, explaining that such a move does not align with the declining inflation expectations in the markets, nor with Warsh's previous statements indicating that price shocks driven by supply factors do not necessarily warrant a tightening of monetary policy.

Moreover, Warsh may continue to avoid giving clear signals regarding the future path of monetary policy during his press conference, while any reaffirmation of the diminishing impact of artificial intelligence on inflation, or a focus on alternative price metrics, could be interpreted as leaning slightly towards easing.

Citibank expects that the continued slowdown in the labor market and moderate inflation over the coming months will reduce market bets on any additional interest rate increases, potentially paving the way for a rate cut resumption starting October.