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Oil Loses 1% As Fed Temporarily Pauses Rate Hikes

The markets were unsurprised by a Federal Reserve decision on Wednesday to pause interest rate hikes, with the consensus sentiment in the run-up to the announcement that the Fed would leave rates unchanged.

While the Fed said it would hold off on a rate hike this time around, it warned that two more rate hikes are in the books for this year. 

“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the Fed said in a statement following the conclusion on Wednesday of its two-day meeting. 

The Fed Chair Jerome Powell said it had “covered a lot of ground and the full effects of our tightening have yet to be felt”. 

The Fed's rate hikes have led to a stronger dollar, making dollar-denominated commodities more expensive and weighing on oil and commodity prices. While still above the Fed’s target inflation rate of 2%, the trend of easing price pressures in recent months might persuade the central bank to pause its aggressive rate hike. The Fed has hiked its policy rate by 500 basis points in this tightening cycle.

The day before the Fed’s rate hike decision, data showed that U.S. consumer prices climbed only 0.1% in May, compared to the 0.4% increase the previous month as falling fuel and electricity prices eased inflationary pressure. 

The Consumer Price Index (CPI)  increased 4.0% Y/Y, also an improvement from the previous month’s 4.9%Y/Y increase. Economists polled by Reuters had forecast at least a 0.2% M/M CPI increase and a 4.1% gain on a year-on-year basis. Gasoline prices fell 5.6% while utility gas also cost less, while food prices increased 0.2%.

After rallying strongly on Tuesday, oil prices on Wednesday were flatlining, having pared the previous day’s gains and moving into negative territory once again. 

At 3:58 p.m. EST, both WTI and Brent crude were trading down nearly 1%. 

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By Charles Kennedy for Oilprice.com

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