June Fed Rate Hike Now More Likely Than Cut Amid Growing Stagflation Fears

Just weeks ago, most investors expected the Federal Reserve to slash interest rates this year. Now, the odds of a rate hike in June have overtaken those of a cut, fueled by the sharp rise in energy prices and mounting inflation concerns.

Markets Flip as Iran Conflict Drives Inflation Worries

Last month, the market was pricing in a nearly 60% chance of a Federal Reserve interest rate cut within three months. That shifted dramatically in March, with the probability dropping to around 16%, while the chance of a rate hike climbed to roughly 15%, according to the Atlanta Fed’s Market Probability Tracker.

That’s a big turnaround fueled largely by the war in Iran. The conflict has sent oil prices soaring past $100 a barrel, pushing up energy costs worldwide. Higher energy prices tend to ripple through the economy, driving inflation up and squeezing consumers and businesses alike.

Ryan Detrick, chief market strategist at Carson Group, called the shift "unbelievable" given where expectations stood just a month ago. He noted that inflation worries were already brewing before the Iran war erupted, but the conflict accelerated concerns and pushed markets to reLook at the Fed’s next moves.

Stagflation Fears Return to the Spotlight

Inflation fears have sent shockwaves through global markets.

Treasury yields jumped, while safe-haven assets like gold and silver fell. Some analysts now talk openly about stagflation — a toxic mix of slowing growth and rising inflation similar to the 1970s.

Ed Yardeni, president of Yardeni Research, recently increased the odds of a stagflation-driven market meltdown to 35% this year, up from 20%. He cited the energy shock from the Iran conflict and its knock-on effects on fertilizer prices, which threaten agricultural output and food costs.

Fed Chair Jerome Powell, however, dismissed the term as outdated during a recent press conference.

Still, many economists warn the war makes the Fed’s task. Fighting inflation is harder when energy prices are rising rapidly, limiting the central bank’s room to maneuver without choking off economic growth.

Mortgage Rates Climb Amid Inflation Concerns

Higher inflation expectations have pushed mortgage rates to their highest in over three months.

The average 30-year fixed mortgage rate ticked up to 6.22% this week, from 6.11% the week before. That’s a key psychological barrier, especially since rates briefly dipped below 6% in February for the first time in years.

This increase threatens to cool the spring homebuying season. Mortgage applications dropped 10% last week, according to the Mortgage Bankers Association. MBA CEO Bob Broeksmit warned that rising rates tied to Middle East tensions could dampen what should be a busy spring market.

Mortgage rates tend to track the 10-year Treasury yield, which surged from 3.96% before the Iran war to about 4.28% recently. The jump reflects investors’ growing worry that rising oil prices will stoke inflation and slow economic growth.

Powell Stresses Uncertainty Despite Economic Resilience

Federal Reserve Chair Jerome Powell struck a cautiously optimistic tone this week, calling the U.S.

Economy "amazing to see" given the barrage of shocks it has endured over the past few years. Still, Powell repeatedly emphasized the unknowns ahead, especially regarding the Iran conflict’s economic fallout.

He highlighted how the Fed has navigated a series of crises—pandemic, tariffs, Ukraine war—and managed to avoid a recession despite widespread predictions. Yet, inflation remains stubbornly above the Fed’s 2% target, with core personal consumption expenditures (PCE) running around 3%.

Powell also noted the role tariffs have played in keeping inflation elevated longer than expected. Wholesale prices surprised markets with a hotter-than-expected reading recently, adding to concerns that inflation might not cool as quickly as hoped.

Meanwhile, the labor market shows signs of stalling, with private-sector hiring flattening after adjustments for earlier overcounts. That mix of stubborn inflation and a slowing job market puts the Fed in a tough spot as it weighs possible rate hikes against the risk of tipping the economy into recession.

With markets shifting rapidly and inflation pressures mounting, the Federal Reserve faces a delicate balancing act. Investors and policymakers alike await the Fed’s next move, knowing that the fallout from the Iran conflict could reshape the U.S. Economy in unpredictable ways.