A question that was hard to imagine a few weeks ago: Will the Federal Reserve's next step be "interest rate hikes"?

With the outbreak of the Iran conflict and the surge in fuel prices, a question that seemed almost unimaginable a few weeks ago has emerged: Will the Federal Reserve's next move be to raise interest rates? Financial markets are beginning to consider this a possibility. Traders in the derivatives market estimate that the probability of an interest rate hike this year is about 25%. This shift in expectations highlights the direct impact of geopolitical conflicts on global energy markets and inflation prospects, prompting investors to reprice the Federal Reserve's policy path. Although most economists expect the Federal Reserve to remain on hold at the upcoming meeting, the discussion of interest rate hikes is no longer taboo. Analysts believe this dynamic not only breaks the market's general expectation that the Federal Reserve will continue to cut rates but also injects a high degree of uncertainty into the future direction of monetary policy, directly affecting bond yields and the risk appetite in the stock market. Federal Reserve officials will hold a monetary policy meeting from March 17 to 18. The market will closely watch Powell's statements for any clues about the future path of interest rates. Inflation Concerns Resurface, Calls for Rate Hikes Emerge The surge in oil prices has directly raised inflation expectations, prompting some market participants to call for the Federal Reserve to take tightening actions. Carl Weinberg, Chief Economist at High Frequency Economics, believes that the Federal Reserve should raise interest rates at the upcoming meeting. He predicts that by this summer, oil prices will push the Federal Reserve's favored inflation measure—the Personal Consumption Expenditures Price Index (PCE)—up to an annual rate of 3.5%. "The Federal Reserve's job is to minimize the risk of the worst outcomes, namely prices accelerating beyond target," Weinberg wrote in a report to clients. He added: "Even if the Federal Open Market Committee (FOMC) does not raise rates next week—we are not ruling out that possibility—officials will certainly discuss the issue, and we expect Mr. Powell to let us know about it in his press conference." Despite the emergence of calls for rate hikes, most economists expect the Federal Reserve to take no action in the short term. Given the uncertainty brought by the war, almost all economists anticipate that the Federal Reserve will adopt a 'wait-and-see' attitude. Former Dallas Fed President Robert Kaplan urged the central bank to remain patient. He stated, "I have a strange feeling that by the end of March, the situation will look different from now." Former senior Federal Reserve official Vincent Reinhart also pointed out that most within the Federal Reserve still lean towards easing monetary policy, "but are in no rush." He believes that "the events in the Middle East have not changed this direction, only giving you more reasons to wait." Additionally, Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, noted that a prerequisite for rate hikes is that the labor market not only rebounds but strengthens. However, the U.S. labor market has been struggling, averaging only 6,000 new jobs over the past three months. Looking for Signals of Policy Shift Although the Federal Reserve is likely to keep interest rates unchanged, economists will closely monitor any signals regarding the Fed's next steps. James Egelhof, Chief U.S. Economist at BNP Paribas Securities, stated that he will watch whether Fed officials change their wording to indicate plans for rate cuts or hikes in the coming months. The Fed's standard script requires officials to "look through" oil price shocks or view them as temporary, as inflation related to rising oil prices is not expected to be persistent. However, Egelhof pointed out that given the high inflation since 2021 still persists five years later, there will be significant divisions among Fed officials on whether to take this approach. Bill Adams, Chief Economist at Comerica, agrees that the Fed will signal an openness to both rate hikes and cuts. He stated: "If inflation is at the 2% target level, the Fed's concerns about credibility and anchoring inflation expectations will be less than they are now." Adams noted that policymakers may signal that they will use tools to prevent energy price shocks from translating into rising trend inflation rates. "This is a conditional willingness to raise rates, but not a signal for rate hikes in the near future."