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July 27 (Reuters) - A growing number of major brokerages believe there is a real risk of the Federal Reserve delivering a rate hike at its meeting this week, given this month's surge in oil prices and the escalation in tensions in the Middle East.
Most brokerages, including BofA Global Research and Deutsche Bank, still expect Fed policymakers to keep rates unchanged, but limited guidance from Chair Kevin Warsh, combined with the re-escalation of conflict in the Gulf and rising oil prices, has turned the July rate decision into a close call.
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Brent crude hit $100 a barrel last week, fanning fears that policymakers will need to be more aggressive in raising rates to control inflation, which consistently has run well above the Fed's 2% annual target.
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"The spike in oil prices has made it a close call," strategists at BofA said on Friday, adding that Warsh faces a difficult choice as not hiking could challenge the Fed's credibility on inflation.
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Most major brokerages expect the Fed to keep rates unchanged this year as their base case, with BofA and Deutsche Bank the exceptions, forecasting three and two rate hikes, respectively, starting in September.
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"We would not be surprised if they raised rates ... to demonstrate their inflation-fighting resolve," strategists at UBS Global Research said on Friday, adding that Fed Chair Warsh's influence would likely be a deciding factor.
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However, Citigroup, a long-standing Fed dove, argued that a credibility-driven rate hike would be difficult to justify, as market-based inflation expectations have fallen to low levels, indicating limited concern about persistently high inflation.
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Market pricing shows traders are attaching a roughly 32% chance of a Fed hike this week, from around 10% just two weeks ago.
Reporting by Joel Jose in Bengaluru; Editing by Amanda Cooper and Maju Samuel
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