Is Wash also powerless to turn the tide? Under the chaos in the Middle East, the Federal Reserve may find it difficult to escape the fate of interest rate hikes.

Source: Jintian Data

Macquarie predicts that the Federal Reserve’s next move will be a rate hike—most likely in the first half of next year. Even if Waller may already have taken the position by then, after all, he only has one vote．．．．．．

Just a few weeks ago, Wall Street was certain that the Fed’s monetary policy path would pivot toward easing: market expectations were that the benchmark interest rate would keep “returning to normal” from its pandemic-era highs, inevitably falling below the current 3.5%—3.75% range.

Even before U.S. President Trump launched a military action against Iran, this consensus had already been challenged. Inflation remains stubbornly above the 2% target. Although the labor market is shaky, it has not yet deteriorated enough to prompt the Federal Open Market Committee (FOMC), which sets interest rates, to take major action.

With no sign of the Middle East turmoil easing quickly, the expectation that the Fed can deliver even a single rate cut this year has become increasingly uncertain, despite this being policymakers’ median expectation. Some economists now believe that the FOMC’s next move will be a rate hike.

The conflict has a major impact on the Fed’s policy mandate, because it hits a range of indicators at both ends—businesses and consumers. Most importantly, supply disruptions in the region have pushed up oil prices: gas prices have already broken through $4 per gallon, which is the most direct transmission of rising international oil prices to ordinary Americans.

Economists and analysts initially widely hoped the conflict would end within weeks. However, the White House seems somewhat strained: in just the past few days, Israel has carried out airstrikes on Iranian oil fields, and Iran has retaliated with an attack on Qatar.

On March 19, Iran’s Foreign Minister Seyed Abbas Araghchi wrote on the social platform X that this attack used only “a small portion of Iran’s strength.” He added: “The only reason for restraint is to respect calls from all sides to ease the situation. If our infrastructure is attacked again, there will be no restraint.” In the short term, it can be said there is hardly any sign that tensions will ease.

The inflationary pressure caused by the conflict may last longer than expected, which means the Fed may ultimately struggle to carry out further rate cuts that Trump has repeatedly insisted on.

David Doyle of Macquarie, in a client report issued after this week’s Powell press conference, emphasized: “Aside from noting the uncertainty around the Middle East conflict’s impact on the U.S. economy, the wording changes in the Fed’s statement have been very limited.”

Therefore, “we believe the next policy move will be a rate hike, and the most likely timing is the first half of 2027.”

Although Doyle is on the more hawkish side among Fed watchers, he is not the only one with a similar view. Gregory Daco, chief economist at Ernst & Young—Patron, wrote on Wednesday: “Given the upside risks to inflation, as well as the hawkish stance of most Fed officials to ‘be twice as cautious after once getting burned,’ our baseline forecast is that the Fed will only cut rates by 25 basis points in 2026, and most likely in December.”

Even so, “it is entirely possible that the Fed will make zero rate cuts this year, and the likelihood that the next policy move will be a rate hike rather than a cut should not be underestimated.”

Can Waller really change the fate of rate hikes?

Investors seem to have already leaned toward agreeing with this assessment. According to the CME Fed Watch tool, with just over a month until the next FOMC meeting, the probability that rate traders have priced in for the April meeting to hold rates unchanged exceeds 87%.

For much of the past year, the market’s expectations have swung between “hold steady” and “rate cuts,” but the situation has now changed. Speculators have started pricing in the possibility of rate hikes. As of the time of publication, traders expect a 50% probability that the Fed will hike rates before October.

One factor that could change this probability at future meetings is the arrival of the new Fed chair: Kevin Warsh, who was nominated by Trump. Even though the approval process timeline for Warsh remains in question, one thing is clear to the market: whoever takes over as head of the Fed will be more dovish on monetary policy than Powell.

Trump has made it clear that the nominee he selects must be willing to accept rate cuts. Warsh could become an ally of Fed Governor Stephan Miran—also nominated by Trump—who has long argued for deeper rate cuts.

However, the rate hike in 2027 that Doyle predicts is likely to occur during Warsh’s new leadership tenure, which means the incoming chair may not be able to deliver the rapid rate cuts the White House expects. Warsh’s votes at the benchmark rate level are just one among many votes; as chair, his words carry extremely heavy weight, and the market will closely watch.

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责任编辑：刘万里 SF014