Higher oil prices could push Fed to resume rate hikes later this year: ICICI Bank report

NEW DELHI: Rising oil prices driven by recent geopolitical tensions could prompt the US Federal Reserve to resume interest rate hikes later this year if they fuel inflation, according to a report by ICICI Bank.

The report said the Federal Open Market Committee (FOMC) is likely to remain on pause in the near term while continuing to assess incoming economic data, but warned that renewed inflationary pressures through the oil price channel could alter the policy outlook.

“Recent geopolitical events pose a major risk to inflation through the oil price channel. If inflation starts inching up in response to higher oil prices, the Fed could start tightening policy later this year,” the report said.

The Fed kept interest rates unchanged at 3.5 per cent-3.75 per cent in its July policy meeting announcement on Thursday, although three members voted in favour of a rate hike, marking the biggest dissent for any Federal Reserve chair this early in a tenure since 1970.

The policy statement remained largely unchanged, with the central bank noting that economic activity continues to expand, the labour market remains stable and inflation is still above its 2 per cent target.

According to ICICI Bank, the Fed has reinforced its data-dependent approach, with future policy decisions likely to be driven by incoming inflation and labour market data rather than forward guidance.

The report also noted that the Bureau of Economic Analysis is revising the methodology for the Personal Consumption Expenditures (PCE) inflation index, the Fed’s preferred inflation gauge. The changes are expected to lower core PCE inflation by around 20 basis points, potentially giving policymakers greater room to keep rates unchanged.

At the same time, the report said a meaningful moderation in inflation accompanied by signs of a slowing labour market would support an extended period of policy stability. It added that the Fed’s ongoing work through task forces on communication, inflation, balance sheet management and data interpretation would also shape its longer-term policy thinking.

Following the Fed’s decision, US Treasury yields, particularly at the longer end, and the US dollar strengthened as markets reacted to the central bank’s emphasis on a data-driven policy approach, the report added. (ANI)