Traders now see a 52% chance of a Fed hike as oil shock stirs stagflation fears
Investors are dusting off a scenario they thought was behind them: the US Federal Reserve’s next move could be a rate hike, not a cut, as the Iran war drives an oil shock through global markets and reignites stagflation fears.
According to CNBC, traders in the futures market have pushed the implied probability of a Fed rate increase by the end of 2026 to 52 percent, the first time it has crossed the 50 percent threshold, based on the CME Group FedWatch tool.
Market pricing now points to no chance of a rate reduction, even though Fed officials’ own projections still show one cut this year.
The shift comes as inflation pressures build on several fronts.
The US Bureau of Labor Statistics said import prices jumped 1.3 percent in February, the biggest monthly rise since March 2022, while export prices climbed 1.5 percent, the largest gain since May 2022.
At the same time, CNBC reported that the Organization for Economic Cooperation and Development sharply raised its forecast for US inflation this year, now expecting headline prices to rise at 4.2 percent, well above both its previous projection and the Fed’s 2.7 percent expectation.
Those developments land as recession odds creep higher.
As per CNBC, Moody’s Analytics puts the probability of a US downturn near 50 percent, Goldman Sachs has lifted its forecast to 30 percent, and EY Parthenon and Wilmington Trust are assigning odds of 40 percent or more.
The combination of elevated inflation and a potential economic pullback is putting the Fed’s dual goals of low inflation and full employment under growing strain.
Fed communications have turned more conditional.
The Wall Street Journal reported that while policymakers still officially project cuts, several now say the next move could be “higher or lower” as tariffs and oil keep inflation elevated and the US labour market looks soft but not collapsing.
Fed Governor Lisa Cook said the Iran war’s impact on energy prices has made stubborn inflation the main concern.
Chicago Fed President Austan Goolsbee told CNBC that the Fed might still need to raise rates, although he also sees room for several cuts if inflation improves.
The Wall Street Journal said a string of six rate cuts that began in September 2024 has already lowered the Fed’s target to 3.5 percent–3.75 percent, almost 2 percentage points below its earlier peak.
Fed Vice Chair Philip Jefferson said recent moves “put the rate broadly in the range of neutral,” while Richmond Fed President Thomas Barkin said the federal funds rate sits at “the higher end of the range of neutral.”
The Journal also reported that inflation has exceeded the Fed’s 2 percent goal for six straight years this month and is about 3 percent on the central bank’s preferred measure, fuelling concern that inflation expectations could drift higher.
At the same time, Jefferson has pushed back against the idea that recent events force a hike.
According to CNBC, he said uncertainty over tariffs and higher oil prices complicates the Fed’s goals of maximum employment and price stability, adding downside risk for jobs and upside risk for inflation. He still views policy as “well positioned to respond to a range of outcomes.”
CNBC reported that for the April 28–29 meeting, markets mostly expect no move, with only a 6.2 percent chance of a hike.
Oil sits at the centre of the shock.
Reuters reported that Brent crude futures rose 4.22 percent to settle at US$112.57 a barrel and US West Texas Intermediate gained 5.4 percent to US$99.64 as attacks in the Gulf and the effective closure of the Strait of Hormuz disrupted a route used to ship about one‑fifth of the world’s oil and gas supply.
AP News said Brent has climbed to US$105.32 from roughly US$70 just before the war began.
According to NBC News, average US gasoline prices reached US$3.98 a gallon, the highest since the summer of 2022, while a Bloomberg News report cited by NBC News said officials and Wall Street analysts have begun considering scenarios where oil hits US$200 a barrel in what they describe as the largest oil shock in decades.
The geopolitical backdrop remains volatile.
NBC News reported that Iran‑backed Houthi militants launched ballistic missiles at Israel and that 3,500 additional US troops arrived in the Middle East as the conflict hit the one‑month mark.
US President Donald Trump has insisted the United States “will make a deal” with Iran and claimed Tehran “gave us most of” a 15‑point plan to end the war, while also telling the Financial Times he wants to “take the oil in Iran.”
Reuters reported that Iran’s Islamic Revolutionary Guard Corps has reiterated it will continue to disrupt shipping through the Strait, even as Trump extends deadlines tied to reopening the route.
Risk assets and havens have responded unevenly.
AP News reported that the S&P 500 has just completed its fifth straight losing week, its worst stretch since the war with Iran began, and that both the Dow and Nasdaq are now more than 10 percent below recent records, meeting the usual definition of a correction.
Reuters said global equities have sold off across the United States, Europe and Asia, while government bond yields have risen as investors assume central banks are more likely to raise rates to counter an inflationary oil shock.
The 10‑year US Treasury yield has climbed to around 4.43 percent–4.48 percent from 3.97 percent before the conflict, the US dollar index has advanced for four straight sessions, and spot gold has fallen more than 15 percent this month, its steepest monthly drop since October 2008, even as intraday price action remains volatile.
