The Iranian War Has Raised the Stakes for a Federal Reserve Interest Rate Hike
Investors have increased bets that the Federal Reserve will raise interest rates by 0.25% at its upcoming meeting. The probability has risen to 38% amid surging oil prices due to the escalation of the Iranian war.
Investors have increased bets that the Federal Reserve will raise interest rates in three days at the next policy meeting, against the backdrop of a surge in oil prices due to the escalation of the Iranian war, which threatens to ignite a new wave of inflation.
According to a report in the 'Financial Times', markets are pricing in a 38% chance that the Fed will raise rates by 0.25% this week, compared to a 13% chance last week — this is according to data from CME Group, one of the world's largest financial exchange companies, based on federal funds futures. The increased probability of a rate hike reflects the growing pressure on Fed Chair Kevin Warsh to show that the US central bank is prepared to act in the event of a renewed inflationary flare-up.
This is a sharp change from the sentiment recorded since July 14, when inflation data that was more moderate than the forecasts published in June — 3.5% on an annual basis compared to an expected 3.8% — lowered the chances of a rate hike. Robert Sokin, chief US economist at PGIM, which manages $1.4 trillion in assets, described the next Fed meeting as a 'nearly 50-50 chance' regarding a possible rate hike.
Crude oil prices crossed the $100 per barrel mark last Thursday for the first time since May, after US President Donald Trump threatened that he was considering launching a 'massive attack' against Iran. Thus, benchmark oil prices were 25% higher compared to the data preceding the previous Fed meeting in June. Yesterday, a barrel of Brent crude was already trading at about $91, after Trump backed down from his plans, but uncertainty on this front remains high.
Against the backdrop of the Iranian war, gasoline and diesel prices have soared in recent weeks, a heavy blow for American industry and households. Investors noted that there is a great deal of ambiguity regarding the plans that the Fed will reveal at the policy meeting this week, because Chair Warsh does not often reveal his views on the economy, unlike his predecessor Jay Powell, who very rarely forced markets to guess what the Fed's next moves would be.
According to CME, trading in federal funds futures ahead of this week's meeting was 50% higher compared to data from July 2025, when markets correctly priced in a 96% chance that the Federal Reserve would leave interest rates unchanged. According to Agha Mirza, a senior analyst at CME, the higher trading volumes occurred because of 'the intensification of the discourse around the question of whether the market is correctly pricing a lower chance of a rate hike, given Warsh's conservatism on the issue of inflation.'
Warsh told Congress earlier this month that he would have 'zero tolerance' for persistent high inflation, but, as is his custom, revealed very few hints regarding his plans.
