Fed, Inflation & Oil Shock: What Investors Need to Know 

The July Fed meeting kicking off today with the Reid announcement and pressor set for Wednesday afternoon.

Now in addition to semiconductor pressure, max 7 earnings as well as PC and GDP data, investors are closely tracking global central bank rate decisions over the next few days.

And here in the US traders are expecting rates to hold steady tomorrow and that does come despite the.

Year yield trading above the 4.3% level and also as we see bond yields are seeing volatility this year and in other words, bond traders are pricing in 25 basis point rate hikes at least for now and at the same time in the FX markets, the US dollar just high of 2026 highs.

Well joining me this morning to weigh in is James Knightley, chief international.

Economist at ING, great to have you here.

Thank you so much for joining me.

We continue to see plenty of volatility across global markets and as we head into the rate decision tomorrow for the Federal Reserve, what are your expectations?

It's a really interesting one because just 2 weeks ago, next to nothing was price, but now we've actually got the market looking the same.

There's a 1 in 3 chance of a hike tomorrow.

The data doesn't really seemingly justify that.

We've had some really good inflation numbers.

We've had lower than expected jobs numbers, but I think this volatility in oil prices, yep, oil is down again today, but there's this concern we've still not got a deal.

And if there isn't the transit of ships through the Strait of Hormuz pretty quickly, oil prices, gas prices could rise once again, and that could mean inflation stays higher for longer.

So I think markets sort of leaning well they could hike.

I think economists are much more.

Confident that they won't purely because there isn't the economic justification as it as it right now.

It's more likely if they do hike to be a September decision when they also release new forecasts and can provide more of a broader update on their thinking.

And we're also paying attention to Fed Chair Warsh's comments tomorrow afternoon, and you mentioned inflation, so of course we're continuing to monitor oil prices and we've seen plenty of volatility.

So sometimes I have to rack my brain to figure out what we saw in terms of price action last week versus this week and also in terms of global bond yields because last week for the 10 year as well as 2 years we saw them sky.

Rocket to highs we haven't seen since the beginning of 2025.

So with so many moving parts here from an economist's perspective, what does this mean for American consumers and prices?

Yes, I think if we look at the prices story, I think when we look at the interest rate expectations immediately after the inflation data we got two weeks ago, markets were pricing barely 50% chance of a September rate hike and nothing for tomorrow.

Since then we've had no economic data whatsoever.

We've not heard anything from any of the Fed officials.

It's just purely been a reaction to the oil price, which jumped from $68 a barrel up to above $90 a barrel in West Texas.

We've since seen that come back down, but interestingly interest rate hike expectations haven't shifted.

They've sort of locked themselves in this thinking that we could see a rate hike pretty soon.

I would argue actually oil prices at these levels, about $80 a barrel, $81 a barrel, is actually consistent with gasoline prices falling from about $4 a gallon 10 today down towards $3.70.

So I think there's still momentum for lower inflation coming through, but the mindset is focused on well they may well hike and economists say there is actually a really big spread between.

Economists are and where the market is, we'll see what happens tomorrow when it comes to global central banks, whether we're talking about the or, we know that different economies are affected differently, obviously by the conflict in the Middle East.

So whether we're talking about gas prices or diesel or net gas, we have to keep in mind that we're heading into the colder months of the year.

And that will also have an impact.

So when it comes to global central banks versus the US, what are you seeing?

I think it's important to point out that the US is much more insulated from the economic headwinds being generated.

It's not immune because we are still facing higher oil prices, but natural gas prices here have actually fallen, so it's more of just a pure price play on oil and oil products, whereas in Europe and Northern Asia. heading into a winter where they need to rebuild inventory pretty quickly, but if there's no ships transiting through the Straits of Hormuz, they've got real problems.

So they've got a price shock, not just to oil but also to natural gas, but also they've got a supply shock as well, and that compounds the problem.

So it's much more challenging economically for those European and Northern Asian countries that are so reliant on foreign imported sources.

And I do want to get your perspective when it comes to the ethic markets as well, since we're talking about central banks.

So as we head into the rest of the year here in the US, it is midterm election year, so that is also something that we're paying attention to.

So between the US currency and the upcoming midterm elections, what is your forecast when it comes to?

I think the dollar is probably going to stay firm in the near term because we're not going to get the Fed saying don't worry, we're not going to be hiking at all tomorrow.

So it's going to keep those market expectations for the Fed in play and I guess the volatility in geopolitics is also going to keep the dollar bid as well.

So 3rd quarter I think the dollar can remain pretty firm around these sorts of levels, but we have a seasonal factor in the 4th quarter.

The dollar typically weakens because of tax payments and companies moving money around.

But then next year, hopefully when we've got.

Everything more relaxed, everything moving back to a more normal period, then that can perhaps allow the European currencies, the Asian currencies, to perform a little bit better.

And so we will be looking for the euro dollar rate to head towards 120 on a year-end basis for 2027.

And finally, before I let you go, we're counting down to the presser by Kevin Warsh tomorrow afternoon.

We have been hearing about his appointments for the different task forces.

So what do you think we can expect moving forward from the task forces?

They're not due to report until the very end of this year, so he could try and provide a little bit of an update, but it's still very early days, so I don't think we'll get too much from that.

And as you say, he likes brevity.

He likes.

He doesn't, he thinks the folks talks too much, and we saw that in the statement last time around.

130 odd words versus normal 350 to 380 words within the press release, and I think the press conference tomorrow is also going to be a little bit shorter, a little bit snappier.

Well, a lot to watch out for as we head into the rest of the week.

So James, appreciate your time and thank you so much for your perspective.

Thank you.