Citigroup economists are maintaining their forecast that the Federal Reserve will keep interest rates unchanged at its July 29, 2026 meeting, despite a recent surge in crude oil prices. This prediction comes even as recent developments in the Middle East crisis, which led to a more than 5% drop in oil prices at the week's open, have eased some inflation fears and tempered Fed rate-hike bets. The bank argues that an earlier tamer-than-expected June consumer price index reading and a slowdown in payroll growth make it difficult to justify a rate hike, especially after officials opted against one in June.
While the market has priced in approximately a 30% chance of a rate hike following the oil price increase, Citi anticipates a dovish interpretation of the decision to hold rates steady. This is expected to lead to lower government bond yields and a weakening USD. However, Citi also acknowledges that there will likely be strong dissenting opinions from some Fed policymakers, such as Cleveland Federal Reserve President Beth Hammack and Dallas Federal Reserve President Lorie Logan, who may vote for a hike. More than two dissenting votes would signal a more hawkish stance.
Citi's chief US economist, Andrew Hollenhorst, believes that while the Labor Department's May employment report spurred hawkish inflation concerns, the labor market is likely to soften over the next three months. This softening, he indicates, will cause the market to shift back to pricing in potential rate cuts rather than hikes. This contrasts with earlier market sentiment where tensions in the Middle East had sent oil prices soaring in July, leading some Fed watchers to see the possibility of dissents at the July 28-29 meeting if policy remained unchanged.
