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

Why is Powell’s tenure crucial for interest rate hikes?

Financial Associated Press, March 21 (Editor: Liu Rui) — As conflicts in the Middle East escalate and international oil prices soar, Wall Street is increasingly worried that U.S. inflation may reignite, prompting the Federal Reserve to delay rate cuts or even raise interest rates.

U.S. banks have stated that “whether the Fed will raise interest rates this year” has been a question their clients have been asking recently. Their answer is: although the possibility cannot be completely ruled out, the Fed must meet certain specific conditions to raise rates.

Fed Rate Hike Expectations Trigger a “Double Kill” in Stocks and Bonds

According to CME FedWatch Tool, Wall Street traders expect the probability of the Fed raising rates before the end of this year to exceed 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 breaking above 4% for the first time since July.

However, U.S. 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 caused by the Iran conflict 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 believes 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 raising rates, 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 February, which may cause Fed officials to worry about the stability of U.S. employment.

2. Further Escalation of Inflation

The bank states that the Fed also needs to see the Iran conflict driving inflation higher. Core U.S. inflation must rise further, not just energy prices, but broad price increases 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 if energy prices remain high long-term, they will increase input costs across the economy. Rising oil and gas prices could also trigger price 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 disappeared—if inflation is linked to tariffs, the Fed might have reason to ignore inflation, as Fed officials generally consider tariffs to be temporary.

3. Powell’s Reappointment as Fed Chair

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

In May, Powell’s term will be nearing its end, 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 Trump-nominated Fed Chair candidate, Kevin Wirth, would take over before the June meeting.

However, Wirth needs Senate confirmation to officially assume the role, and this confirmation might be delayed. Currently, North Carolina Senator Thom Tillis has stated he will not confirm Wirth until the legal investigation into Powell by the Trump administration concludes. Trump also stated on Thursday that he continues to support the Department of Justice’s investigation into Powell—this stance could further delay Wirth’s confirmation process.

At this week’s monetary policy meeting, Powell already indicated that if his successor is not confirmed by then, he will continue to serve as interim chair.

U.S. banks believe Powell is a “dovish moderate,” meaning “if the U.S. labor market and inflation risks are roughly balanced, Powell will prioritize the labor market over inflation.”

In contrast, Wirth clearly holds a more dovish policy stance. Bank of America believes that if Wirth becomes chair, the threshold for Fed rate hikes will be significantly higher.

(Financial Associated Press, Liu Rui)