It was unthinkable a couple of weeks ago, but could the next move by the Fed be a rate hike?

MW It was unthinkable a couple of weeks ago, but could the next move by the Fed be a rate hike?

By Greg Robb

Financial markets are starting to think it could happen

Federal Reserve Chair Jerome Powell speaks at his press conference in January.

With fuel prices soaring since the start of the war with Iran, a question has surfaced that was almost unimaginable a few weeks ago: Could the next move by the Federal Reserve be an interest-rate hike?

Financial markets are starting to think it could happen. Traders in derivative markets see a roughly 25% probability of a rate hike this year.

In 2022 and 2023, the Fed pushed rates up quickly to combat postpandemic inflation that hit a 7% annual rate. Since mid-2024, the Fed has been gradually lowering interest rates as inflation has cooled. They picked up the pace of cuts late last year to provide some insurance for the weakening labor market, and in December, the Fed said it expects more rate cuts this year and next.

Fed officials will meet to set interest-rate policy on March 17-18. They'll announce their decision at 2 p.m. Eastern time on March 18, followed by a press conference with Fed Chair Jerome Powell at 2:30 p.m.

Carl Weinberg, chief economist at High Frequency Economics, thinks the Fed should hike next week. He forecasts that oil prices (CL00) (CL.1) will push the Fed's preferred inflation measure, the personal-consumption expenditures price index, up to a 3.5% annual rate by summer.

"The Fed's job is to minimize the risk of the worst-possible outcome, which would be accelerating prices above target," Weinberg wrote in a note to clients.

"Even if the FOMC does not hike next week - which we now refuse to rule out - officials will surely talk about it, and we expect Mr. Powell will let us know about it at his press conference," he added.

Most economists expect the Fed to wait before making any moves

To be sure, a rate cut at the meeting next week is an outlier forecast.

Almost all economists expect the Fed to make no move, as part of a "wait and see" approach given the fog of war.

Many economists think the Fed is still likely to cut rates at some point this year, but they've pushed back their forecasts for the timing of any cut until September or later.

Former Dallas Fed President Robert Kaplan urged the central bank to be patient. "I have a funny feeling things are going to look different at the end of March than they do now," he said in a CNBC interview.

Former top Fed official Vincent Rheinhart said the majority in the Fed is still leaning toward easing monetary policy, "but is in no way in a hurry."

"The events in the Middle East don't change that direction and only give you more reason to want to wait," he said in an interview with MarketWatch.

At the same time, a rate hike is also unlikely, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

One precondition for a hike would be that the labor market would have to not only rebound but strengthen, Luzzetti noted. Yet the U.S. labor market has been struggling, adding an average of only 6,000 jobs over the past three months.

Watching for signals

Though it's likely the central bank will hold rates steady next week, economists will be watching closely for any signals about what the Fed plans to do next.

James Egelhof, chief U.S. economist at BNP Paribas Securities, said he'll be looking to see if Fed officials shift their language to indicate they plan to cut or hike in the coming months. In January, the Fed said it was considering "the extent and timing of additional adjustments," referring to additional cuts.

"Our base case is that policymakers delay the change in the [policy] statement for now" and consider the language at their April meeting, Egelhof said in an interview - though "there will be some Fed officials arguing for acting now," he noted.

The standard Fed playbook calls for officials to "look through" an oil price shock, or treat it as temporary, because the inflation tied to oil price increases won't last. This playbook calls on the Fed to keep an eye out for renewed weakness in the labor market, which could warrant further easing.

Egelhof said he thinks Fed officials will be closely divided on whether to pursue this approach, given that higher inflation from 2021 still persists five years later. Some Fed officials will say that this playbook is "an inappropriate risk to take," he said.

"We're not sure which way they will go - they are closely divided," Egelhof added.

Bill Adams, chief economist at Comerica, agreed that the Fed would signal some openness to either hiking or lowering rates.

"The Fed is more concerned about credibility and anchoring inflation expectations than they would have been if inflation was at their 2% target," he said in an interview.

Policymakers will likely signal they would use their tools to prevent the energy price shock from translating into an increase in the trend inflation rate, Adams noted.

"It's a conditional willingness to raise interest rates, but not a signal of a rate hike in the near future," he said.

-Greg Robb

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 14, 2026 07:30 ET (11:30 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.