Investors have lifted odds that the Federal Reserve is on the verge of raising interest rates, but lingering labour-market fragility and the risks to growth from surging oil prices make that a long shot, at least for now.
On March 19, federal funds rate futures showed a 6% chance of an April hike, and have stayed in positive territory since. This marked the first time since December 2023 that investors saw a hike at the central bank’s next policy meeting as more likely than a cut.
The shift by investors illustrates the enormous uncertainty for the US economy created by the war and by the potential ripple effects of a surge in oil prices. But economists and analysts who closely follow the central bank say a rate hike in the near term remains a highly unlikely.
"Of course the oil shock is a new inflation risk, but it’s also, if anything, a negative growth shock and maybe negative for employment,” said Veronica Clark, an economist at Citigroup Inc.
Policymakers appear to agree. In their most recent set of economic projections, issued after the war began, none of the Fed’s 19 policymakers penciled in rate increases this year and only one did so for 2027. Most, in fact, signaled another cut.
"The possibility rather, that our next move might be an increase did come up at the meeting,” Fed Chair Jerome Powell told reporters after the gathering last week. Still, a "vast majority” of the Federal Open Market Committee don’t see a hike as their base case scenario, he added.
Officials have been quick to point out that the impact of an oil-price shock on inflation can be temporary, and moving rates can take many months to influence the economy. That means the downward pressure a rate hike places on inflation might only arrive after price increases are over, or even reversed.
To justify an increase in rates, many analysts said the spike in energy prices would have to be prolonged, bleed into other products and services, and be accompanied by a job market that was driving up wages.
"The real reason you would raise rates is if the labour market looks strong,” said Jonathan Pingle, chief US economist at UBS.
That’s not quite what Fed officials predict. Their median forecast sees the unemployment rate ending the year at 4.4%, exactly where it is now, and several policymakers remain worried the labor market is fragile.
Memories of the 2022 oil shock resulting from Russia’s invasion of Ukraine could be weighing on investors. Prices took off in February 2022 and the Fed was hiking by March. But the economic context was very different. The Fed’s favoured inflation gauge had already moved above 6% by the beginning of that year while unemployment had fully recovered from the pandemic. Companies were scrambling for workers amid a tight job market, further fueling inflationary pressures.
In contrast, the US labour market was on an extended hiring slump heading into 2026. While signs of stabilization emerged late last year, officials saw a surprise drop in payrolls in February.
"Labour markets are much less tight, there is no pent-up demand/pandemic style fiscal, and to date supply chain disruptions remain moderate,” Krishna Guha and Gang Lyu, analysts at Evercore ISI, wrote in a note to clients Monday.
Meanwhile, most officials still expect price pressures will ease as the impact of tariffs fades. Last week, Governor Christopher Waller said "caution” was warranted in assessing the consequences of surging oil prices. He stressed that new signs of weakness in the labor market would make him "start advocating again for cutting.”
To be sure, some officials are also careful to acknowledge the uncertainty ahead. Chicago Fed President Austan Goolsbee said he can envision scenarios featuring multiple rate cuts and others involving rate increases.
So what’s going with futures? It’s not that traders aren’t getting the message on what the Fed is thinking. Futures markets are just more nuanced than a measure of expectations.
Molly Brooks, a rates strategist at TD Securities, said some of the trades are less like predictions and more like insurance policies protecting against an unlikely but damaging outcome.
"Prior to the initial strikes in Iran, we were all looking at fundamentals and everyone was biased toward cutting,” Brooks said. "As soon as we saw the oil shock, concerns about inflation came back around.”
Markets also can, and frequently do, course correct more easily than the Fed can signal a shift in direction.
"Certainly the Fed doesn’t like to surprise markets. They like to have their next move priced,” said Citigroup’s Clark. "But there’s plenty of time that, if they were going to be cutting again, we could reprice it.”
There’s one final reason to question the likelihood of a rate hike: If and when he’s confirmed by the Senate, Kevin Warsh, President Donald Trump’s nominee for Fed chair will be under severe pressure from the White House to lower rates.