The expectation of a rate hike rebound: preemptive measures or an excessive reaction? The market and mainstream views are currently diverging.

Against the backdrop of escalating oil prices in the Middle East, there have been subtle changes in market expectations for the Federal Reserve's policy path. Although investors are starting to bet that the Fed may shift towards raising interest rates, most economists and policymakers still believe that the likelihood of a rate hike in the short term is low. Data shows that as of March 19, the implied probability of a rate hike in April in the federal funds rate futures has risen to 6% and remained in positive territory. This is the first time since December 2023 that the market has considered the possibility of a rate hike at the next meeting to be higher than a rate cut. However, analysts generally believe that this change reflects more market uncertainty from geopolitical shocks and rising oil prices, rather than an impending policy shift. Economists at Citigroup pointed out that while surging oil prices pose new inflation risks, they may also drag down economic growth and put pressure on employment. From a policy perspective, Federal Reserve officials overall remain cautious. In the latest economic forecasts, none of the 19 policymakers expect a rate hike this year, and most lean towards further rate cuts. Federal Reserve Chairman Powell also stated that although the possibility of a rate hike was discussed at meetings, the majority of officials do not consider it to be the baseline scenario. Officials also emphasize that the impact of oil price shocks on inflation may be temporary, and monetary policy adjustments usually take longer to transmit to the economy. This means that if rates are raised hastily, the suppressive effect may only be felt after inflation pressures have already eased. Analysts point out that a rate hike would only be justified in a situation where energy prices remain high, spread to a wider range of goods and services, labor market significantly strengthens, and wage pressures rise. However, the current situation does not meet these conditions. In fact, the Federal Reserve's assessment of the job market remains cautious. Official forecasts indicate that the unemployment rate will remain around 4.4% this year, and many officials are still concerned about the lack of resilience in the labor market. Additionally, US employment showed weakness in early 2026, despite stabilizing at the end of last year, unexpected decline in non-farm payrolls in February this year highlights potential risks. Compared to the oil price shock caused by the Russia-Ukraine conflict in 2022, when inflation was high and the labor market was tight, the Federal Reserve quickly started a rate-hiking cycle; the current inflation and employment environment is clearly different, with weaker demand for labor by businesses and relatively mild supply chain pressures. At the same time, the Federal Reserve maintains policy flexibility internally. Some officials have indicated that multiple rate cuts may occur in the future, and the possibility of rate hikes under certain conditions is not ruled out. On the market front, changes in interest rate futures are also seen as "hedging trades." Analysts point out that some trades are not direct predictions of rate hikes, but rather risk hedging to prevent inflation spiraling out of control in extreme scenarios. In addition, the policy outlook is also influenced by political factors. If Kevin Warsh, a nominee for Federal Reserve Chairman appointed by Trump, is confirmed, his previous emphasis on the need for rate cuts may further decrease the likelihood of rate hikes.