DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange continued lower early Tuesday as the U.S. Dollar Index advanced for the third straight session with investors positioning ahead of policy meetings by the U.S. Federal Open Market Committee and European Central Bank where officials are expected to signal more rate hikes for 2023 amid signs of reacceleration in fuel costs and a tight labor market in the United States.

The Federal Reserve is widely expected to dial back the size of rate increases to 0.25% on Wednesday, bringing the federal funds rates to a target range between 4.5% and 4.75%.

Despite the downshift, the Fed is unlikely to depart from its hawkish message of "higher interest rates for longer," defying expectations for an imminent pivot. Officials at the central bank have repeatedly pounded the message that they see interest rates rising above 5% this year and staying there until 2024, stressing the need to do more work to tame prices. Recent economic data supports this view. The U.S. labor market barely budged last year under pressure from rising interest rates, with the national unemployment rate remaining near its historic low of 3.5% and high-frequency jobless claims continuing to fall. Even as headline inflation eased from its midsummer peak of 9.1% to the current 6.5%, it is still way above the Fed's 2% target. The reopening of the Chinese economy, a potential spike in oil prices and the ongoing war in the Ukraine all could lead to a re-acceleration of inflationary pressures.

The double-edged risk of a tight labor market and potential for higher oil prices is the reason why the Fed will continue delivering a hawkish message until there is clear evidence inflation is indeed on track toward the 2% target. A growing number of investment banks are now reassessing their outlook on how aggressive the Federal Reserve would be this year. "We expect that a hike this 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%," said David Mericle, chief U.S. economist at Goldman Sachs.

"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." he added.

A stronger U.S. dollar this morning follows the slow shift in these expectations, with the greenback gaining 0.14% to 102.230 in index trading against foreign currencies, while weighing on the front-month West Texas Intermediate contract. WTI for March delivery declined $0.81 to $77.10 barrel (bbl) -- the lowest since Jan. 11, and the international crude benchmark Brent dropped $0.61 to $84.29/bbl. NYMEX RBOB February contract declined $0.0246 to $2.4743 gallon, and front-month ULSD futures plummeted $0.0329 to $3.0779 gallon.

In equity markets, the S&P 500 fell 0.3% early Tuesday and the Dow Jones Industrial Average edged down 0.4%.

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