DTN Oil

WASHINGTON, D.C. (DTN) -- Reversing earlier gains triggered by rising geopolitical tensions in Eastern Europe, international and U.S. crude benchmarks fell Wednesday in reaction to the Federal Open Market Committee's decision to raise interest rates by 0.75% for the third consecutive meeting this year, while sharply downgrading economic growth projections through 2024.

The 0.75% increase in the federal funds rate announced at the conclusion of the FOMC's two-day monetary policy meeting Wednesday afternoon was expected, following through on hawkish messaging by the Federal Reserve that the central bank will take aggressive action to lower inflation to its 2% target. Prior to 2022, the Fed last matched a hike of this magnitude in 1994.

The policy action lifts the key overnight borrowing rate to a 3% to 3.25% target range, with the so-called "dot-plot" released this afternoon indicating the federal funds rate will climb to 4.4% by year's end. Markets are now pricing in an 85% chance of another 0.75% rate hike at the next FOMC meeting in November.

During an afternoon news conference in Washington, D.C., Fed Chairman Jerome Powell cautioned that there is no path in lowering inflation without economic pain, saying "higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they're not as painful as failing to restore price stability and having to come back and do it down the road again."

The Consumer Price Index, which measures inflation, was up 8.3% in August from 12 months earlier, according to the Bureau of Economic Analysis.

Fed's economic projections released alongside the central bank's rate decision clearly point to a slowing economy, rising unemployment and inflation that stays well above 2% until at least 2025.

The Fed cut its U.S. economic growth projections to just 0.2% this year, down from 1.7% seen in June, with 2023 GDP growth remaining well below trendline at 1.2%. PCE Inflation rate, meanwhile, is seen at 5.4% by year's end before falling to 2.8% in 2023. Central bank officials don't see inflation returning to 2% even in 2024.

What is surprising is that the U.S. unemployment rate is projected to remain nearly unchanged this year at 3.8%, suggesting the tight labor market will remain tight despite rising interest rates. That changes next year, with Fed officials expecting a national unemployment rate of 4.4% for both 2023 and 2024.

In reaction to the Fed announcement, U.S. dollar index, which has an inverse relationship with West Texas Intermediate, surged to 110.346 at settlement and 111.360 on an intraday basis -- the highest trade since May 2002.

WTI futures for November delivery fell to $82.94 bbl, down $1, while the front-month Brent contract declined to $89.83 bbl. NYMEX ULSD October futures declined 3.84cts to $3.3338 gallon, and the front-month RBOB contract gained 3.87cts for a $2.4865 gallon settlement.

Earlier in the session, oil futures traded sharply higher on the back of rising tensions between Russia and Ukraine after Russian President Vladimir Putin ordered partial mobilization of the Russian military, calling on 300,000 reserve troops to be deployed in Donbass and Lugansk regions. Raising the stakes further, the Russian leader once again threatened the use of nuclear weapons should the territorial integrity of Russia be threatened.

During a televised address to the nation, Putin claimed "collective West attempts to break up Russia in many different pieces," comparing it to the breakup of the Soviet Union in 1991.

The new phase in the conflict follows an earlier announcement from the leaders of self-proclaimed republics of Donbass, Lugansk, Kherson, and Zaporizhiya to hold referendums on joining Russia as early as Friday (9/23). The referendums are to be concluded by Sept. 27 without the proper oversight of international organizations, mirroring the annexation of Crimea that was quickly approved by the Russian government in 2014.

Referendums in Eastern Ukraine could either serve as a precursor to a larger war with Ukraine as it gives Russia the ground to claim Ukraine attacked Russian territory, or a getaway to freeze the conflict by deterring further attacks.

Liubov Georges can be reached at liubov.georges@dtn.com