Fed rate hikes may be up for debate - but credit conditions are already tighter

MW Fed rate hikes may be up for debate - but credit conditions are already tighter

By Joy Wiltermuth

Bond yields are higher and credit spreads are wider as the Iran conflict drags into a fourth week.

An easy way to start a heated debate on Wall Street right now is to ask whether the Federal Reserve will hike interest rates.

While unthinkable only a few weeks ago, the Iran conflict - and the effective closure of the crucial Strait of Hormuz - has triggered a historic oil shock.

Higher oil prices, as hostilities drag into a fourth week, have been fueling concern that inflation could keep rising at an unacceptable pace, which could open the door to potential Fed hikes.

"Our belief has been that it would probably keep the Fed on hold, rather than it actually, outright, hiking rates," said Gennadiy Goldberg, head of U.S. interest-rates strategy at TD Securities. Yet what Fed officials don't want is to "make the transitory mistake again," he said. "That's really the worry."

The odds of the Fed raising interest rates in 2026 eclipsed 25% on Friday, before easing back to about 15% late Monday, according to the CME FedWatch Tool.

It helped that President Donald Trump early Monday said he would hold off on threatened U.S. military attacks against Iran's energy infrastructure to allow for talks around ending hostilities in the Middle East to bear fruit, even though Tehran denied talks were happening.

Brent crude prices (BRN00) (BRNK26) settled below $100 a barrel on Monday for the first time in about a week, before climbing in extended trading back above the threshold. U.S. West Texas Intermediate crude prices (CL00) (CLK26) fell about 10%, ending around $98 a barrel.

Iran's effective closure of the crucial Strait of Hormuz has pushed U.S. and global oil futures up by about 55% and 65%, respectively, on the year, according to FactSet.

Crucially, the waterway also transports about a third of the world's fertilizer, according to Dragonfly, a risk-analysis and security-intelligence service owned by MarketWatch's parent company, Dow Jones. That could trigger higher food prices, but also greater food instability, particularly if the closure results in a missed planting season.

"A large majority of this market is highly correlated to oil," said George Catrambone, head of fixed income, Americas, at DWS. In addition to oil and fertilizer, the strait also serves an important transit point for metals, aluminum products and copper, he said.

With U.S. wage growth already showing signs of declining, along with personal savings, higher prices for oil, gas and commodities would likely spark questions about what growth and consumption looks like in the second half of this year, Catrambone said. "It's taxing to American consumers."

Read: This is what's cutting into your pay raise - if you get a bump at all

Despite the rising odds of Fed hikes, Catrambone is in the camp that the Fed most likely will reduce interest rates to aid the economy if oil prices remain high, not raise them.

Another factor in financial markets has been the tightening of financial conditions since the U.S. and Israel attacked Iran on Feb. 28.

The benchmark 10-year Treasury yield BX:TMUBMUSD10Y was near 4.35% on Monday. That's up from under 4% in October, according to Dow Jones Market Data. Higher yields push up borrowing costs for households, businesses and the federal government.

Many highly rated U.S. companies already pulled forward some of their funding needs in the first two-and-a-half months of 2026, said Kyle Stegemeyer, head of investment-grade debt capital markets and syndicate at Minneapolis-based U.S. Bank.

That's recently fueled near-record weekly bond issuance, he said, while there's also been modest widening of credit spreads. Treasury rates are used as a starting point for pricing new bond deals, plus a certain spread to help compensate investors for credit risks. The uptick in borrowing costs can be traced partially to the Iran conflict, but also to the large financing needs of the AI buildout.

Amazon (AMZN), Oracle $(ORCL)$ and Alphabet $(GOOGL)$ $(GOOG)$ all recently sold bonds this year as part of their AI plans, while Meta $(META)$ and Microsoft $(MSFT)$ could be waiting in the wings.

"Every time you get one out of the way, you are still looking over your shoulder to see if something else is to come," said Matt Brill, Invesco's head of North America investment-grade credit.

Beyond that, he's trying to gauge how long the iran conflict goes on - and what it does to oil prices. "The market would clearly prefer it be done quicker," he said.

-Joy Wiltermuth

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March 24, 2026 08:00 ET (12:00 GMT)

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