"Fed Rate Hike" Nightmare Could Come True? BofA: Three Major Conditions Must Be Met First

As the Middle East conflict escalates, international oil prices soar, and Wall Street becomes increasingly worried that U.S. inflation may reignite, potentially prompting the Federal Reserve to delay rate cuts or even raise interest rates.

Bank of America stated that “whether the Federal Reserve will raise interest rates this year” has been a question their clients have been asking recently. Their answer is: while the possibility cannot be completely ruled out, the Fed would need to meet certain specific conditions to raise rates.

Fed Rate Hike Expectations Trigger “Stock and Bond Double Kill”

According to CME FedWatch Tool, Wall Street traders now estimate that the probability of the Fed raising rates before the end of this year exceeds 30%, while the chance of a rate cut is only 6.1%.

Against this backdrop, market panic continues to rise, with U.S. stocks declining for the fourth consecutive week, marking the longest decline in a year. Meanwhile, the U.S. bond market also suffered heavy losses, with the 10-year Treasury yield soaring by 13.4 basis points at one point, and the 5-year Treasury yield surpassing 4% for the first time since July.

However, Bank of America economists still believe that the likelihood of the Fed cutting rates in 2026 remains higher than that of raising rates, especially as the oil price surge triggered by the Iran war subsides.

They acknowledge that ongoing Middle East conflicts have had a “persistent but moderate” impact on the U.S. economy, which indeed increases the risk of rate hikes. However, Bank of America suggests that if the Fed does raise rates in 2026, three conditions must be met first.

1. Stable Labor Market

Bank of America believes that the primary condition for the Fed to raise rates is a stable labor market.

They wrote: “If the Fed is to consider rate hikes, it must first be confident that the labor market can remain stable.”

Bank of America states that the U.S. unemployment rate needs to stay below 4.5%. In recent months, the unemployment rate has hovered between 4.3% and 4.6%.

The latest employment report shows that the U.S. unemployment rate slightly increased to 4.4%, and unexpectedly, non-farm payrolls decreased by 92,000 in the same month, which may raise concerns among Fed officials about the stability of U.S. employment.

2. Further Inflation Escalation

The bank indicates that the Fed also needs to see the Iran war driving inflation higher. Core U.S. inflation must continue to rise, not just energy prices, but broadly across other sectors, before considering a rate hike.

So far, disruptions in the Strait of Hormuz mainly affect energy exports, so the inflation impact is temporarily limited to the energy sector.

However, it’s important to note that prolonged increases in energy prices could raise input costs across the economy. Rising oil and gas prices might also trigger increases in related sectors (such as fertilizers and helium), gradually and persistently expanding inflationary pressures.

Bank of America analysts also mentioned that concerns about tariffs in the market have almost dissipated—if inflation is linked to tariffs, the Fed might have reason to ignore inflation, as Fed officials generally see tariffs as temporary.

3. Powell’s Reappointment as Fed Chair

The final necessary condition for the Fed to consider rate hikes this year is Jerome Powell’s continued tenure as Fed Chair.

In May, Powell’s term is set to expire, and before that, he has one last opportunity to chair the Federal Open Market Committee (FOMC) meeting.

According to the original plan, after Powell’s term ends, the Fed Chair nominated by Trump, Kevin W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W. W.