Fed Rate Hike Probability Exceeds 30% Before Year-End, But Bank of America Says Three Key Conditions Must Be Met

On March 21, according to Cailian Press, as Middle East tensions continue to escalate and oil prices surge, Wall Street is increasingly concerned that U.S. inflation may rebound, potentially prompting the Federal Reserve to pause rate cuts or even shift to a rate hike strategy.

According to the CME FedWatch tool, traders estimate the probability of a Fed rate hike before the end of this year has exceeded 30%, while the probability of a rate cut stands at only 6.1%. Additionally, U.S. stocks have declined for the fourth consecutive week, marking the longest losing streak in a year; the 10-year U.S. Treasury yield surged 13.4 basis points at one point.

Meanwhile, in response to clients repeatedly asking "Will the Fed raise rates this year?", Bank of America responded that while it cannot completely rule out this possibility, the Federal Reserve must simultaneously satisfy three conditions to raise rates.

First, the labor market must remain stable, with the unemployment rate staying below 4.5%. However, the actual situation appears bleak, as the February unemployment rate has quietly climbed to 4.4%, while non-farm employment unexpectedly declined by 92,000 jobs, causing the Fed deep concern about employment stability prospects.

Second, U.S. core inflation must further deteriorate, and this inflation cannot be limited to the energy sector alone; other sectors should also show synchronized price increases.

Currently, logistics through the Strait of Hormuz face disruptions, with energy exports being the primary sector affected. If energy prices continue to rise over an extended period, input costs across the entire economic system will surge accordingly, subsequently triggering inflationary pressures to spread to other sectors.

Third, Powell may continue to serve as Fed "interim chair" after his term ends. Powell's term expires in May of this year, but his successor Waller, nominated by Trump, may face a Senate confirmation process lasting several months, thus potentially facing delays.

Powell stated that if his successor does not obtain final confirmation, he will continue to serve as interim chair. Additionally, Powell is a "dovish moderate" who prioritizes the labor market over inflation; while Waller takes a more accommodative stance, and if he assumes the chair position, it would significantly raise the rate hike threshold.

In summary, although #rate hike probability has increased, Bank of America economists still believe that the possibility of a rate cut in 2026 remains greater than a rate hike, especially once the oil price shock triggered by the Iran conflict subsides.

#Rate Hike and Rate Cut Expectations