Federal Reserve shifts toward rate hikes as gas prices drive inflation

Investors no longer expect a rate cut until late 2027. This shift in market expectations follows minutes from the Federal Reserve's March 17-18 meeting, which show a growing number of policymakers willing to consider interest rate hikes this year. Between January and the March meeting, the number of officials supporting a potential hike rose from 'several' to 'some'.

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monetary policy

Fed Officials Consider Rate Hikes to Counter Middle East Energy Price Surges

The target range for the federal funds rate may be adjusted upward. This possibility is reflected in a new two-sided description of future interest-rate decisions. The Federal Open Market Committee held the benchmark policy rate in a range of 3.5% to 3.75% during its March 17-18 meeting, but policymakers now worry that prolonged conflict in the Middle East will lead to persistent increases in energy prices. Global energy costs surged for three weeks following that meeting. Because inflation has run above target for five years, officials noted that long-term inflation expectations may become more sensitive to these energy price increases. This volatility leads to persistent increases in underlying inflation, which may prompt officials to consider raising interest rates if inflation remains above target levels.

This change in stance is a departure from an 18-month trend of leaning toward rate cuts. The Federal Reserve kept its key rate unchanged at approximately 3.6 per cent in March, after cutting rates three times at the end of 2025.

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monetary policy

Fed Rate Hike Possibility Shifts Investor Exposure Toward Financials

Investors may need to avoid stocks of companies that borrow heavily, especially real estate investment trusts, and overweight financial stocks. Financial stocks see an increase in their net interest margins—the difference between what they earn on loans and pay on deposits—when rates rise. This shift in exposure is a response to the possibility that the Federal Reserve may raise benchmark interest rates this year. Cleveland Federal Reserve President Beth Hammack stated a rate hike is possible if inflation stays persistently above target. Chicago Fed President Austan Goolsbee said rate increases must be on the table if inflation ticks up. Minutes from the January meeting show 19 rate-setting committee officials wanted the Fed's statement to reflect the possibility of hikes. Risk assets like stocks tend to fare poorly when the Fed raises rates to tighten the money supply. The current yield of the two-year Treasury note is trading above the effective Fed funds rate, suggesting bond traders expect a higher rate in the near future.

Policymakers pointed to the risk that higher oil and gas prices, stemming from the Iran war, could keep inflation elevated longer than expected. Fed officials acknowledged that these same gas price spikes could force households to cut back spending to offset the costs, slowing economic growth and raising unemployment.

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inflation

High Core PCE Means Rates Stay Higher for Longer—Here’s What It Costs You

A 3.1% rise in Core PCE inflation through January 2026 means interest rates will stay elevated—and borrowing will remain expensive—for longer than many consumers hoped. While headline inflation cooled to 2.8%, the Federal Reserve focuses on Core PCE because it strips out volatile food and energy prices to reveal underlying inflation trends. At 3.1%, it remains stubbornly above the Fed’s 2% target. That number is not a forecast. It is the anchor of the Fed’s decision-making. And it shows the central bank has no justification to cut rates. Higher rates persist because the Fed fears that relaxing policy too soon could re-ignite inflation expectations, triggering a cycle of wage and price increases the labor market can’t sustain. Services inflation, which surged to 3.5%, reflects this pressure: as wages rise, providers pass costs to consumers in healthcare, childcare, and legal services. Americans are adapting—shifting $105.7 billion more toward services and cutting $24.6 billion in goods spending—but that shift only confirms demand remains strong. Strong demand means inflation stays sticky. And sticky inflation means no relief on borrowing costs. The personal saving rate has already dropped to 4.5%, near historic lows, meaning households have less cushion to absorb continued price growth. If spending slows not by choice but because savings run dry, the Fed may pause rate hikes to avoid a hard landing. But until Core PCE shows a clear path to 2%, the central bank will keep the brakes on. That means higher monthly payments on loans, tighter household budgets, and a longer wait for cheaper credit.

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monetary policy

Fed Officials Consider Rate Hikes to Counter Middle East Energy Price Surges

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monetary policy

Fed Rate Hike Possibility Shifts Investor Exposure Toward Financials

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High Core PCE Means Rates Stay Higher for Longer—Here’s What It Costs You

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