DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Monday's session sharply lower pressured by a firmer U.S. dollar and risk-off sentiment in financial markets as traders turned cautious ahead of this week's two-day Federal Open Market Committee meeting beginning Tuesday when central bank officials are expected to lift the federal funds rate a smaller 0.25% but deliver a hawkish message that more rate hikes are on the horizon in 2023.

Market participants overwhelmingly expect the Federal Reserve to deliver a 0.25% rate hike at the meeting's conclusion Wednesday afternoon, slowing the pace of increases for a second month. The move would still bring the federal funds rate to a range between 4.5% and 4.75%.

The current debate is centered not around the scale of those hikes but how many times the Fed will raise rates this year and how long the central bank will hold them there. The key to answering that question is the shape of the U.S. economy that has sent mixed signals to even seasoned economists. Inflation has rapidly eased from a mid-summer peak at a 9.1% annualized rate to 6.5% in December, and while still well above the Fed's 2% target, consumer prices are clearly moving in the right direction.

Consumers have pulled back on spending, the economy has slowed, and key measures of business activity in manufacturing and services sectors fell into contraction at the end of 2022. Yet, the labor market barely budged under pressure from rising interest rates, with the national unemployment remaining near its historic low of 3.5% and high-frequency jobless claims keep on falling. This could hold the key to reacceleration of inflation later this year and the reason why the Fed will continue delivering a hawkish message until there is more evidence that inflation is indeed on track toward the 2% target.

Markets continue to think that the Fed will soon pause its rate increases and some investors even bet on cuts later this year because they think interest rates are already in restrictive territory to bring about recession. Market pricing is for a peak federal funds rate of 4.93% in June, then coming down to 4.53% at year's end.

A growing number of economists hold a divergent view.

"While the consensus worries that the lagged effect of rate hikes will cause a recession this year, our model says the opposite -- the drag on growth from monetary policy tightening will diminish substantially in 2023," said David Mericle, chief U.S. economist at Goldman Sachs.

"We expect that a hike next week will be followed by two additional 25 basis points hikes in March and May, which would raise the target range for the funds rate to a peak of 5-5.25%," he added.

A stronger U.S. dollar today follows the slow shift in expectations, with the dollar gaining 0.36% to 102.086 in index trading against foreign currencies, while weighing on the front-month West Texas Intermediate contract. WTI for March delivery plummeted $1.78 to settle at $77.90 bbl -- the lowest settlement since Jan. 11, and the international crude benchmark Brent contract dropped back $1.76 to $84.90 bbl. NYMEX RBOB February contract declined $0.0897 to $2.4989 gallon, and front-month ULSD futures plummeted $0.1547 to $3.1108 gallon.

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