Despite Oil’s Rally, Fed Holds Off On Rate Hike

The U.S. Federal Reserve on Wednesday decided to hold interest rates steady for September, indicating next year may see fewer rate cuts that analysts had earlier anticipated. 

Still, amid inflation that remains elevated despite a fairly strong economy, the Fed has signaled there may be another rate hike later this year. 

Wednesday decision means the benchmark short-term interest rate will remain at 5.25% to 5.5%, a 22-year high. 

This is only the second time since March 2022 that the Fed meetings have concluded without another rate hike.  

But oil could be what tips the Fed over the edge. 

"Economic data reports continue to show a slowing economy. ... If there is one thing that could potentially persuade the Fed to raise rates later this year, it’s oil," CNN quoted JJ Kinahan, chief executive at IG Group North America, as saying on Wednesday. 

Oanda senior market analyst Craig Erlam likewise noted that “At a time when central banks are starting to see the light at the end of the inflation tunnel, $100+ oil will be incredibly unwelcome and unhelpful. I'm not sure there's much economic sense in tipping the global economy into recession if OPEC+ persevered with these cuts, which makes me question how high the price will go and how sustainable it will be,” as reported by Yahoo Finance. 

Oil hit $95 per barrel earlier this week, and predictions of at least $100 oil are gaining momentum among the bull camps. 

Last week’s 3.7% jump in the U.S. Consumer Price Index (CPI) was largely accounted for by a spike in gasoline prices, with CPI data overall showing a decrease in inflation.  

In the UK, as well, analysts are concerned that soaring oil prices could reverse consumer price inflation that has been declining since February this year, with the Bank of English set to decide on interest rates on Thursday. 

By Charles Kennedy for Oilprice.com

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