Oil crisis upends Fed expectations: Probability of rate hike triples

Market expectations are changing rapidly ahead of the critical meeting the US Federal Reserve (Fed) will hold on July 30. The fact that oil prices have once again crossed the 100-dollar threshold due to the impact of escalating geopolitical tensions in Iran has triggered fears that inflationary pressures will increase. According to CME Group data, the interest rate hike option, which had almost been taken off the table at the beginning of July, has regained strength, and the probability of the Fed raising the policy rate by 25 basis points has surged from 13 percent to 38 percent within a week.

OIL PRICES HAVE CHANGED THE BALANCE

Behind this sharp change in expectations lie new supply concerns emerging in the global energy market. US President Donald Trump's statement that they are keeping the option of a "very major attack" on Iran on the table has pushed the barrel price of Brent crude to its highest level since May. Brent crude, which has gained approximately 25 percent in value since the last Fed meeting in June, has begun to increase the cost burden for both consumers and industrialists through gasoline and diesel prices.

CRITICAL TEST FOR NEW CHAIR KEVIN WARSH

All eyes are now on the new Fed Chair Kevin Warsh, who will face one of his toughest tests since taking office. It is being wondered whether Warsh, who emphasized in his presentation to Congress in July that he would have "zero tolerance" for high inflation, will adopt a more hawkish stance than his predecessor Jerome Powell. The fact that the PCE inflation closely monitored by the Fed came in at 4.1 percent in May, well above the 2 percent target, also supports these expectations.

Bank of America Head of US Rates Strategy Mark Cabana stated that the July meeting is now open to any decision, while PGIM Chief Economist Robert Sockin described the situation as "almost a coin toss." Sockin pointed out that hawkish views within the Fed are beginning to reach a critical majority.

HAWKISH WING STRENGTHENING WITHIN THE FED

Among the members of the Federal Open Market Committee (FOMC), the voices of those advocating for a rate hike are growing louder. It is stated that in addition to Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari is also of the opinion that no more time should be lost in the fight against inflation. In contrast, figures such as New York Fed President John Williams argue that they should wait until September, pointing to consumer inflation, which remained below expectations at 3.5 percent in June.

Economists warn that in addition to energy prices, potential customs tariffs by the Trump administration and the demand created by artificial intelligence investments also carry structural inflation risks. According to SMBC Nikko Securities Chief Economist Joe Lavorgna, although Warsh raising interest rates at this meeting might draw political backlash in the short term, it could help curb inflation expectations, lower long-term bond yields, and consolidate his credibility as chair.