Rate Hike Debate Emerges Amid Oil Price Volatility... July or September?

Probability of July Hike Nears 40% Amid Volatile Oil Prices

Market Volatility Rises on Warsh’s Opaque Communication

International oil prices, which had previously surged past $100 per barrel due to renewed conflict in Iran, have now retreated to the $90 range. However, the prospect of an interest rate hike by the U.S. Federal Reserve (Fed) next week remains a major variable in the market. With rapid fluctuations in oil prices fueling heightened uncertainty in inflation forecasts, attention is focused on whether Federal Reserve Chair Kevin Warsh will move to raise rates at his second monetary policy meeting since taking office.

Kevin Wash, Fed Chair. Photo by AP Yonhap News

According to the Financial Times (FT) on the 26th (local time), the federal funds futures market is reflecting a 36–38% probability that the Fed will increase the benchmark rate by 0.25 percentage points on the 29th. This has risen sharply from 10–13% just a week earlier.

Brent crude surpassed $100 per barrel for the first time since May on the 23rd after U.S. President Donald Trump stated he was considering a "large-scale attack" on Iran. However, following reports that China was seeking to restart peace talks between the U.S. and Iran, prices fell back to the $96 level on the 24th.

Although oil prices have retreated from their peak, market caution has not been completely dispelled. Over the past week, Brent crude rose by about 10%, and the risk of supply disruptions around the Strait of Hormuz due to ongoing military tensions between the U.S. and Iran persists. Investors are closely monitoring not only the absolute level of oil prices but also the potential for repeated sharp fluctuations in a short period to fuel expectations of higher inflation.

The global bond market has also responded immediately. Investors have dumped large volumes of U.S. and European government bonds, resulting in lower bond prices and higher yields. The U.S. 10-year Treasury yield has climbed to its highest level in 18 months, while yields on 10-year German and French government bonds have reached their highest points in about 15 years. Typically, rising long-term rates are interpreted as a sign that inflation concerns are intensifying.

Stronger-than-expected U.S. economic and labor market performance is also lending support to the Fed's case for a rate hike. Weekly new jobless claims in the U.S. have dropped to their lowest level since 1969. While the June consumer price index rose 3.5% year-on-year, down from previous months, it still remains well above the Fed's 2% target.

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle, remarked, "The July meeting is open," adding, "Both inflation and the labor market have been stronger than expected, giving the Fed reasons to raise rates."

Uncertainty Rises Over Kevin Warsh's Communication Style... Tariffs and AI Investment Add to Price Pressures

Federal Reserve (Fed). AP Yonhap News

Chair Warsh's unclear communication style is fueling market uncertainty. In contrast to his predecessor Jerome Powell, who generally signaled policy direction in advance, Warsh has provided almost no concrete indications regarding the future policy path. While he emphasized early this month at Congress that he "would not tolerate persistently high inflation," he stopped short of commenting on whether he would raise rates at the upcoming meeting.

Trading volume of rate futures has also risen unusually. According to the Chicago Mercantile Exchange (CME), trading in federal funds futures ahead of this FOMC meeting was 50% higher than it was before the July meeting last year.

Besides oil prices, there is analysis that tariffs imposed by the Trump administration and increased investments in artificial intelligence (AI) are also adding to inflationary pressure. Alongside the AI boom driving up prices for semiconductors and related components, service prices remain stubbornly high.

Portfolio manager Al-Hussainy pointed out, "The current rise in inflation is not only due to oil prices, but also from the pass-through of tariffs, AI-driven demand, and prolonged elevation of service prices."

July Preemptive Hike or Wait Until Confirmation in September?

Agha Mirza, CME's Head of Global Interest Rate Products, explained, "Given Chair Warsh's vigilance on inflation, the debate that markets may be underpricing the likelihood of a rate hike has led to increased trading."

Within the Fed, hawkish voices are growing louder. Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack have both stated that further delay in measures to restrain inflation is unacceptable. Robert Sokinn, Chief U.S. Economist at PGIM, assessed next week's meeting as "almost a toss-up," noting that hawkish sentiment within the Fed is nearing a tipping point.

However, there is also strong opposition to an immediate rate hike on the grounds that internal consensus within the Fed has not yet been achieved. Influential FOMC members, including New York Fed President John Williams, argue that it would be prudent to observe inflation trends through the summer and make a decision in September.

Claudia Sahm, former Fed economist and current chief economist at New Century Advisors, commented, "While the pros and cons of a rate hike will be seriously discussed, it is hard to conclude that there is already a majority in favor of an immediate hike."

This content was produced with the assistance of AI translation services.