As crude oil prices continue to rise, traders have lowered their expectations for a Federal Reserve (Fed) rate cut this year. The market is concerned that soaring energy prices will complicate the Fed's monetary policy path due to increased inflationary pressures. The expanded conflict between the U.S. and Israel against Iran, coupled with disrupted fuel transportation, has heightened worries about interruptions in oil and gas supplies from the Middle East.
Fed Rate Cut Expectations Lowered
According to the CME's FedWatch tool, futures contracts show that the probability of a 25-basis-point rate cut in June has dropped to 30.7%, down from last week's 49.6% and more than 56% a month ago. Previously, traders expected the Fed to resume its rate-cutting cycle in June, but the market now leans more towards the possibility of a rate cut in July, with a probability of 47.2%.
Goldman Sachs Analysis on Oil Prices' Impact on CPI
Goldman Sachs analysts noted in a report that if oil prices continue to rise by 10%, it is expected to raise the core Consumer Price Index (CPI) by 4 basis points, and the overall CPI could rise by 28 basis points. This means that rising oil prices may exacerbate inflation, especially by driving up gasoline and transportation costs, thereby increasing the prices of goods and services.
Future Fed Policy Path Expectations
Currently, traders expect the Fed to cumulatively ease policy by 42 basis points by December, which corresponds to a 25-basis-point rate cut for the year, with the possibility of a second rate cut still in question. The market generally anticipates that the Fed will keep rates unchanged in March and expects three rate cuts in 2025, but before that, the Fed may continue to hold steady until the inflationary pressures from rising oil prices ease.
