Bank of America Warns Fed Could Raise Rates Amid Iran Oil Shock

TLDR

• Bank of America warned a Fed rate hike is possible if the Iran war drives oil prices above $80
• Markets now price a 25% chance of a rate hike by December, up from near zero five days ago
• Fed Chair Powell said rate cuts are unlikely without inflation progress
• Bitcoin is struggling to hold above $70,000 as market pressure builds
• Fed Governor Chris Waller, a known dove, voted to hold rates steady due to rising inflation risks

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The Federal Reserve’s next move is no longer a sure thing. Just one week ago, markets were pricing in rate cuts. Now, the possibility of a rate hike is being taken seriously for the first time in years.

The shift comes as the U.S.-Iran conflict, which began on February 28, pushes oil prices higher and stokes inflation fears. Bank of America outlined three factors that could lead the Fed to raise rates: a stable labor market, Jerome Powell staying on as Fed chair longer than expected, and a sustained oil price shock from the war.

The bank said the risk grows if oil prices hold above $80. Oil has been trading near that level in recent weeks.

What Powell Said

Fed Chair Jerome Powell, speaking at an FOMC press conference this week, said the Fed will not cut rates without clear progress on inflation. He stopped short of saying a rate hike is coming, noting it is not the base case for most officials.

Powell also confirmed he could stay in office until his expected successor, Kevin Warsh, is confirmed by the Senate. That process could take time. If Powell is still chair at the June FOMC meeting, and the Iran war is still driving up oil prices, the pressure to hike could intensify.

Five days ago, markets showed no expectation of a rate hike at all. As of Friday, interest rate futures on the CME FedWatch tool show about a 25% chance of a hike by December. That is a large shift in a short time.

Polymarket data shows a 35% chance the Fed makes zero rate cuts this year. The odds of a full rate hike have risen to 19%, up from 8% when the conflict first broke out.

Source: Polymarket

How Crypto Is Reacting

Bitcoin is feeling the pressure. It has struggled to stay above $70,000 as inflation fears grow and rate cut hopes fade. The total crypto market cap fell from an intraday high of $2.4 trillion to $2.37 trillion on the same day.

The crypto market saw a brief relief rally but then resumed its decline as stocks also fell. Two-year Treasury yields jumped to 3.89%, the highest gap above the Fed’s policy rate in three years. That is a signal bond markets are pricing in tighter monetary policy ahead.

Polymarket data shows the odds of a U.S.-Iran ceasefire have fallen to 42%, meaning traders see the conflict continuing.

Fed Governor Chris Waller, who was previously in favor of cutting rates after a weak February jobs report, changed his vote this week. He said rising inflation risks tied to the Iran war convinced him to vote for holding rates instead. He added it is better to wait and see how the situation develops before making any decisions on cuts.

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