Energy prices are surging, and concerns about stagflation are prompting traders to adjust their expectations for Federal Reserve policy. The probability of a rate hike by the end of 2026 has crossed the 50% mark for the first time, reaching 52%, according to the CME Group FedWatch tool. This shift comes amid rising crude prices exceeding $110 and significant increases in import and export prices, which have heightened inflation worries.

The implications for the financial markets are substantial. The Bureau of Labor Statistics reported a 1.3% jump in import prices for February—the largest monthly increase since March 2022—while export prices rose 1.5%. With the OECD raising its U.S. inflation forecast to 4.2%, well above the Fed’s expectations, the central bank faces increasing pressure as Wall Street economists now see a near 50% chance of recession within the next year.

As the Fed prepares for its next meeting on April 28-29, the market is currently pricing in a high likelihood of maintaining the status quo, with only a 6.2% chance of a rate hike. This environment underscores the delicate balance the Fed must navigate between controlling inflation and supporting employment.

Source: cnbc.com