Bank of America economists have raised the possibility of a Federal Reserve interest rate hike, even as the institution still considers cuts the more probable outcome. The assessment, published Friday, comes as the U.S.-Iran conflict enters its fourth week and energy prices continue to climb. The scenario runs counter to the position of President Donald Trump, who has been pressing the central bank to lower its benchmark rate. Economists outlined specific conditions that would make tighter monetary policy appropriate.
According to the Bank of America note, the likelihood of a rate hike would increase if Fed Chair Jerome Powell‘s tenure extends beyond its expected end, the unemployment rate stays below 4.5%, and rising energy costs begin spreading inflationary pressure into other areas of the economy. Powell indicated on Wednesday that it was “too soon to know” how the conflict would affect the broader economy. His term as chair is scheduled to conclude in May, though he stated he would remain in his role until his successor, former Fed governor Kevin Warsh, is confirmed by the U.S. Senate. Bank of America economists noted that Powell is not as dovish as Warsh is expected to be, which adds weight to the hike scenario, with June identified as the earliest possible meeting for such a move.
West Texas Intermediate oil edged down to $109 per barrel on Friday, though the U.S. benchmark has reached as high as $116 per barrel since the conflict disrupted global energy markets through restrictions on key shipping routes including the Strait of Hormuz. Bank of America economists described an oil price range of $80 to $100 per barrel as a “sweet spot” under which rate hike conditions would most likely be met, characterizing this as a scenario where the Iran shock proves sustained but moderate. Shipping costs for commodities such as fertilizer and aluminum have also surged, raising the prospect of broader supply disruptions.
The bank’s economists also flagged that core inflation is already running at uncomfortable levels, with the Fed’s preferred gauge showing a 2.8% annual increase as of January. That measure has exceeded the Fed’s 2% target for nearly five years. While the Fed’s framework typically looks past volatile food and energy prices and focuses on core goods and services, economists warned that higher energy costs could feed into input prices across those sectors as well. The bank’s base case still calls for two 25-basis-point cuts this year, though traders are currently not pricing in any move until mid-2027, according to CME FedWatch.
Bitcoin was trading below $70,000 on Friday, according to CoinGecko, after touching a 45-day high of $75,600 earlier in the week. The digital asset had fallen as low as $63,000 on the day the conflict with Iran began. James Butterfill, head of research at crypto asset manager CoinShares, noted that exchange-traded funds linked to crypto have posted consecutive days of outflows since Powell’s Wednesday remarks, which he described as a potential preview of what a rate hike could bring for risk assets including stocks and cryptocurrencies.
Butterfill acknowledged that an initial rate hike would not be favorable for Bitcoin, but suggested the asset could recover as investors recognize the potential for a stagflation environment. He drew a parallel to comments made by BlackRock CEO Larry Fink in October, who highlighted crypto and gold as “assets of fear” amid concerns about currency debasement and financial stability. Gerry O’Shea, head of global markets insights at crypto asset manager Hashdex, echoed that view, arguing that macroeconomic headwinds are unlikely to slow institutional adoption of Bitcoin, with many investment advisors treating current conditions as an opportunity to gain client exposure.
Zach Pandl, head of research at crypto asset manager Grayscale, told reporters that a Fed rate hike remains a distant prospect unless rising oil prices begin feeding into longer-term inflation expectations, which would prevent officials from treating the increase as transitory. He attributed Bitcoin’s recent relative outperformance compared to gold and equities to recovering market sentiment and positive industry developments related to stablecoins and tokenization. Bitcoin has fallen significantly from its all-time high of $126,000 recorded last year. On prediction market Myriad, traders placed a 67% probability on Brent crude reaching $120 per barrel before falling to $55, and an 11% chance of a U.S.-Iran ceasefire by the end of the month.
Originally reported by Decrypt.
