Central Banks. Changing the tune and choosing a new song

Can the Fed Hike Rates in 2026: How Geopolitics and Oil Changed the Monetary Trajectory

Just a few months ago, the 2026 scenario seemed almost obvious: gradual rate cuts as inflation slowed and the labor market stabilized. Now, the market is forced to reconsider this assumption. The minutes of the Fed's late January meeting showed a shift in tone—some FOMC members spoke of a "two-sided" approach, meaning a readiness not only to cut but also potentially to raise rates if inflation remained above target.

Inflation is currently around 2.9%, significantly above the 2.0% target. Formally, this is not a critical level, but it is sufficient to change the rhetoric. The Fed maintains the federal funds rate range at 3.50–3.75%, after a 0.75 percentage point reduction since autumn and a 1.75 percentage point reduction since the start of the easing cycle in 2024. This is no longer a tight policy, but it's not stimulating either. The rate is approaching a neutral level.

It is in this context that the "two-sided" phrasing matters. It does not mean that a hike is the baseline scenario. It means that the Fed does not want to cement its image as a central bank that automatically cuts rates at the first sign of a slowdown. After 2022–2023, the central bank seeks to avoid even a hint of raising the inflation target.

Geopolitical escalation and the oil price surge add complexity. If the energy shock proves prolonged, headline inflation could accelerate again. This is particularly sensitive when tariffs are simultaneously in effect, which have already created price pressure in certain sectors. The combination of tariff and energy factors is a classic supply-side shock that is difficult to offset with monetary policy.

At the same time, economic data do not signal the need for tighter policy. Growth remains relatively robust, unemployment shows no sharp rise, and the labor market has stabilized after cooling in the summer. Jerome Powell himself explicitly stated that a rate hike is not the baseline scenario. Most analysts agree that the Fed will remain on pause for the coming months.

Federal funds futures currently price in a 25 basis point cut closer to mid-year rather than a hike. The consensus among some economists suggests two cuts—approximately in June and September—if inflation continues to slow, particularly due to the housing component.

However, the very fact that a discussion about potential hikes has emerged changes the structure of expectations. The market no longer views the easing cycle as one-sided. This has a direct impact on long-term bond yields and the currency market. The dollar receives support not due to an actual rate hike, but due to a reduction in the number of expected cuts.

The political context is also important. The change in Fed chair in the spring adds uncertainty. Donald Trump has openly criticized current policy and advocated for lower rates. His candidate, Kevin Warsh, previously spoke about preferring lower rates combined with a reduction in the Fed's balance sheet. If new leadership truly accelerates asset reduction, it could change the balance between the rate and liquidity.

In conclusion, the scenario of a rate hike in 2026 remains unlikely, but no longer theoretically impossible. The Fed has shifted from a confident easing cycle to a mode of cautious neutrality. Geopolitics, oil, and tariffs have transformed monetary policy from a predictable process into a flexible, data-dependent mechanism. And it is this change in tone—not the actual step—that is currently having the greatest impact on markets.