Expectations For Fed Rate Hikes Dropped After The Latest Inflation Red. They Are Spiking Again Over The War

Fed funds futures price a more than 80% likelihood of an interest rate hike by September as inflation expectations climb again following the most recent flare up in the U.S.-Iran war.

CNBC detailed that, according to CME’s FedWatch tool, the figure currently stands at 82%, a 29-point increase compared to the previous week.

While traders widely expect the central bank to keep rates unchanged in their meeting next week, maintaining it in the 3.50%-3.75% range, many more believe there will be a hike before the year ends.

The shift is largely a result of the spike in global oil prices, which have climbed about 10% this week even despite a drop on Friday. Brent crude, the international benchmark, traded above $98 a barrel after topping $100 on Thursday.

Higher oil prices ripple throughout the economy by raising transportation, manufacturing and shipping costs, which often translate into more expensive goods and services for consumers. Energy also plays a significant role in food production, creating additional upward pressure on grocery prices.

Elsewhere, the European Central Bank kept interest rates unchanged on Thursday, but financial markets are increasingly betting policymakers will raise borrowing costs again as well.

The ECB voted to leave its main interest rate at 2.25%, a decision that was widely expected by economists and investors after the central bank delivered a quarter-percentage-point increase in June, its first rate hike since 2023.

While announcing the decision, the ECB reiterated that it remains committed to ensuring inflation returns to its 2% medium-term target and emphasized that it stands ready to adjust all of its key interest rates if necessary.

The latest inflation data has shown some improvement, with annual eurozone inflation easing to 2.8% last month from 3.2% in May. However, policymakers remain concerned that the recent rebound in energy prices could reverse that progress if oil and gas costs remain elevated for an extended period.

Speaking during a press conference following the policy announcement, ECB President Christine Lagarde warned that renewed disruptions to global energy markets could keep inflation above the central bank’s target longer than previously anticipated.

The war continues in the meantime, and perspectives of a ceasefire agreement appear to be slim. President Donald Trump is currently in “revenge mode” against Iran as talks have failed to yield a lasting peace, according to a new report.

According to the Wall Street Journal, senior administration officials are saying Trump believes only continued escalation will achieve results.

Another new report by The New York Times claimed that Iran rejected a ceasefire proposal sent by the U.S. through the Iraqi prime minister on Thursday. The outlet noted that Ali al-Zaidi conveyed the proposal to Tehran after visiting Washington earlier this month.

However, he was told that Tehran was not interested in a “temporary deal” that would not address the status of the Hormuz Strait, a sticking point in negotiations that led to the current flare up.

At the same time, Trump told Axios on Thursday that he is close to making a decision on whether to launch a “massive attack” against Iran.

“I am considering a massive attack. Bigger than ever before. I am close to making a decision. We are all set for it,” the president told the outlet.