What conditions does the Federal Reserve need to raise rates amid oil price shocks triggered by Iran?

Investing.com - U.S. Bank economist Aditya Bhave stated in a report on Friday that the market has “almost fully priced in the Fed’s rate cuts this year,” and more clients are asking what conditions are needed for the Fed to raise interest rates.

Get in-depth analyst research exclusively on InvestingPro.

The bank believes that “the Fed’s rate hikes require at least three conditions: a stable labor market (unemployment rate < 4.5%), further increases in core inflation (core PCE > 3.2%), and Jerome Powell serving as chairman.”

U.S. Bank said that if the oil price shocks related to Iran “remain sustained but moderate,” these conditions are most likely to be met, adding that the “best range” for potential rate hikes is WTI crude oil prices staying between $80-100.

Bhave warned that Iran poses an upside risk to inflation prospects, stating that “PCE inflation remains high,” making it difficult for the Fed to justify recent rate cuts.

U.S. Bank also noted that Chairman Jerome Powell’s March press conference was interpreted as “hawkish,” highlighting his focus on “overheating inflation and upside risks to inflation expectations,” with less emphasis on downside risks to the labor market.

Powell also emphasized the “high uncertainty surrounding the Iran war.”

“Next week’s data will be relatively sparse. On Monday, construction spending data will be released; on Tuesday, the S&P manufacturing and services PMI; on Wednesday, the import price index; on Thursday, initial jobless claims,” the economist wrote. “On Friday, the final March University of Michigan Consumer Sentiment Index will be released. We expect this data to be somewhat weak, as it will reflect more of the impact of the Iran war than the initial estimate.”

U.S. Bank added that the combination of stubborn inflation and geopolitical risks makes it “difficult for the Fed to argue that inflation data supports recent rate cuts.”