In a report sent to Rigzone by Greg Shearer, Head of Base & Precious Metals at J.P. Morgan, and Natasha Kaneva, J.P. Morgan’s Head of Global Commodities Strategy, analysts at the company, including the above, revealed that J.P. Morgan now expects the Fed to hike rates in December, “versus 3Q27 previously” and warned that September “is clearly a risk if inflation heats up again soon”.
“Last Wednesday, the FOMC [Federal Open Market Committee] left interest rates unchanged, in line with our economists’ expectations, although the three hawkish dissents was one more than anticipated, with the addition of Kashkari as a modest surprise dissent,” the J.P. Morgan analysts said in the report.
“While Chair Warsh’s prepared remarks skewed hawkish in our natural language processing (NLP), he undermined his inflation-fighting credibility by failing to endorse a well-defined target,” they added.
“This, combined with comments on the effectiveness of the Fed’s tools in fighting inflation accelerated a twist steepening in the U.S. Treasury curve, coinciding with a sharp increase in medium-term inflation breakevens, a highly unusual post-FOMC occurrence,” they continued.
The analysts went on to state in the report that, overall, “as the committee tilts more hawkish”, the FOMC “may now be facing market pressures that reflect questions about whether Warsh’s tough talk on inflation will translate into action”.
“This adds some urgency for the rest of the committee to act on its mandate and reinforces our economists’ view that the Fed is moving towards hiking, with the risk of an early move also increasing,” they noted.
“As such, they have pulled forward the next rate hike from 2H27 to December this year and underscore that September is clearly a risk if inflation heats up again soon,” they said.
“Rather than the market ‘pressuring’ the Fed, this revision is more reflective of another challenge prompting the Fed to act to maintain its credibility,” the analysts stated.
So, what does this mean for oil?
Well, in the report, the J.P. Morgan analysts outlined that, for energy, flows in the Strait of Hormuz and Chinese oil import demand “will likely trump the influence of interest rates”.
The analysts highlighted in the report that their base case for oil is “skewed fundamentally bearish over the next 12 months” but pointed out that they still see a “significant bullish tail risk in the near term should shrinking inventory buffers to suddenly become stressed again by a more prolonged further disruption through the Strait of Hormuz”.
“Our base case, which assumes a gradual recovery in Middle East supply over the balance of 2026, sees Brent crude oil prices averaging $80 per barrel in 4Q26 before significant over-supply returns in 2027, sending prices lower to average $63 per barrel next year,” the analysts said in the report.
“That being said, this forecast is highly dependent on a recovering flow rate out of the Strait of Hormuz and hence eventual inventory normalization,” they pointed out.
“With depressed Chinese imports, each additional month of ongoing conflict and lower than expected flows out of the Strait adds roughly $7-8 per barrel to the fair value of Brent, lifting monthly average prices to around $114 per barrel if disruptions extend to three months,” they warned.
Rigzone has contacted the Board of Governors of the Federal Reserve System for comment on J.P. Morgan’s report. At the time of writing, the board has not responded to Rigzone.
A statement posted on the website of the Board of Governors of the Federal Reserve System on July 29 announced that the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, “in support of the Federal Reserve’s dual mandate”.
“The Committee is continuing its policy of maintaining ample reserves in the banking system,” the statement said.
“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” it added.
“Inflation remains elevated relative to the Committee’s two percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability,” it continued.
The statement highlighted that Beth M. Hammack, Neel Kashkari, and Lorie K. Logan voted against the monetary policy action, outlining that they preferred “to raise the target range for the federal funds rate by 1/4 percentage point at this meeting”.
The Board of Governors of the Federal Reserve System site notes that the FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth, the site states.
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