Shift in Market Sentiment: On the Eve of the FOMC Meeting, Discussions of Rate Hikes Emerge

At the beginning of this year, sentiment in the global financial markets was actually leaning towards optimism.

Although the Federal Reserve itself appeared restrained at its final meeting last year, hinting at only a symbolic interest rate cut for the entire year, Wall Street clearly has its own analytical framework. Established institutions like Goldman Sachs, Morgan Stanley, and Bank of America almost unanimously offered a more "aggressive" forecast: at least two rate cuts. Citigroup and some Chinese securities firms were even more hawkish, betting on three cuts.

Beyond economic data, analysts' consensus was also driven by political considerations: the US mid-term elections in November.

For those in power, votes are lifeblood, and to secure votes, the economy needs to heat up. Interest rates are the most direct thermostat, but monetary policy takes time to take effect. Doing the math, if the Trump administration wants to see results by November, the Fed must implement significant rate cuts before October.

Therefore, major institutions' forecasts at the time scheduled the rate cuts for the first half of the year: Goldman Sachs favored March and June, while Nomura Securities eyed June and September.

At the beginning of this year, the highest probability on Polymarket for the number of rate cuts in 2026 was 2

Everyone felt a liquidity "downpour" was imminent.

Traders Start Betting on Rate Hikes

However, Trump has never been one to play by the rules, and he initiated a war in mid-March.

In mid-March, tensions in the Middle East escalated sharply. The strain in the Strait of Hormuz quickly transmitted to the energy markets, with oil prices surging nearly 50% in just two weeks, with some benchmarks briefly exceeding $100. This spike in energy prices directly constrained the Fed's room for rate cuts.

February's CPI data already showed inflation stubbornly above the 2% target. Now, with oil prices adding fuel to the fire, the Fed had to adopt a more hawkish stance.

The previously "100% certain" expectation of a rate cut began to waver, and even a few discussions about "returning to rate hikes" emerged.

While today's FOMC meeting was initially seen as the starting gun for cuts, the current narrative has shifted to a "hawkish pause." According to the latest data, the market is almost 100% certain the Fed will hold rates steady this time.

What's more unsettling is that the CME's FedWatch Tool shows a 1.1% probability of a rate hike bet. Although this percentage is small, it signals a dangerous possibility: the inflation monster might be back.

Analysts' stances have also pivoted accordingly.

Goldman Sachs' chief economist, Jan Hatzius, revised his forecast on March 12, pushing the expected first rate cut from June to September and projecting only two cuts for the year.

JPMorgan Chase was even more blunt: current interest rates might not be effectively restraining the economy. If inflation continues to rebound, the Fed's next move could very well be a hike: "The argument that rates are restrictive is becoming harder to sustain. If the labor market doesn't weaken, the Fed will keep rates high for a long time."

More aggressive voices came from strategists at EY-Parthenon and Carson Group. EY-Parthenon's Gregory Daco suggested there might be no rate cuts this year. Carson Group's Sonu Varghese explicitly stated that due to the oil price surge triggered by the Iran conflict, the Fed might not only refrain from cutting but could even discuss raising rates later this year.

Latest forward-looking analyses from *Caijing* and *Wall Street Insights* also noted that due to rising terminal rate expectations, the 2-year US Treasury yield has broken above 3.75%, often a precursor signaling anticipated policy tightening. Consequently, some traders believe the probability of a rate hike before year-end has risen from 0% to around 35%.

At 2 AM Beijing time early Thursday morning, the Fed will announce its final interest rate decision: whether to hike, cut, or hold steady.

Subsequently, at 2:30 AM, Powell will hold a press conference to speak on monetary policy, the inflation path, and the economic outlook.

It's worth noting that the Fed is in a delicate political window: Powell's term ends on May 15. This is his second-to-last press conference as Fed Chair, and the market is in a waiting period of policy uncertainty. He himself is under significant political pressure, with Trump repeatedly criticizing him publicly and calling for emergency meetings to slash rates. This conflict between external pressure and internal anti-inflation logic adds to policy unpredictability.

Beyond the Fed, global central bank expectations have shifted similarly.

This week, 21 central banks covering two-thirds of the global economy will announce their latest rate decisions. As this is the first "Super Central Bank Week" since the Middle East conflict erupted, global markets are closely watching whether these decisions will be influenced by developments in the region.

The Reserve Bank of Australia just raised rates by another 25 basis points yesterday. The RBA's decision was the first among eight major central banks this week and the first tightening move by a developed economy's central bank this year.

Additionally, the European Central Bank (ECB) is expected to keep rates unchanged at its March 19 meeting, with policymakers warning that global trade policies and geopolitical risks limit the scope for future cuts. The Bank of England (BoE) is also expected to hold rates steady this Thursday, although a minority within the MPC supports a cut, the prevailing stance remains stability-focused.

How Long Will Oil Prices Keep Rising?

If we dissect all the variables, we find an almost unavoidable core factor: oil prices.

If oil prices rise without a ceiling, room for rate cuts shrinks; only when oil prices retreat does monetary policy have room to maneuver.

Thus, the question becomes more direct: how long will oil prices keep rising?

Judging from recent signals released by the US government, the answer might not be as pessimistic as the market fears.

On March 8, US Energy Secretary Chris Wright provided a precise timeline in an interview: he believes the current oil price surge is merely a temporary fear premium, and the situation will improve "within weeks at worst, not months."

This echoes White House Press Secretary Karoline Leavitt's statement a few days earlier that "the oil price increase will only last another 2-3 weeks."

Coincidentally, Trump's remarks on March 10 were even more explicit. He said actions against Iran were progressing much faster than anticipated, even stating bluntly: "I think this war is very close to being finished." On the same day, the Energy Secretary's social media account also stirred a "deleted post" controversy.

Most intriguing is the adjustment in diplomatic scheduling.

Trump, originally scheduled to visit China in early April, suddenly announced a one-month postponement. The official excuse was "too busy with the war" and "needing to stay in Washington for the war." However, if we juxtapose this one-month delay with the Energy Secretary's "2-3 week recovery period," postponing by a month, roughly 4-5 weeks, neatly covers the "2-3 week recovery period" plus initial post-conflict handling time.

Therefore, we can boldly speculate that the Trump administration's script might be: conclude large-scale military operations by late March; in the subsequent 2-3 weeks,配合 strategic petroleum reserve releases, forcefully push oil prices back below $80; by the time he travels in May, the Middle East situation is settled, the inflation threat is neutralized, allowing him to adopt a "victor's" posture, not only demanding significant rate cuts from the Fed but also securing absolute leverage in "US-China" trade negotiations.

The early-year optimism was built on the assumption of "controllable inflation + preemptive policy." The sudden shift in the Middle East situation shook the most critical cornerstone of that assumption—energy prices.

When oil prices lose their anchor, inflation loses its anchor; when inflation loses its anchor, the interest rate path naturally becomes unclear again.

In the coming period, what determines global asset prices will depend on those distant places, those still-busy oil tanker routes, and the not-yet-silenced sounds of artillery.