Economists at Bank of America continue to foresee rate cuts as the primary monetary policy direction. However, they also indicated that escalating energy prices could compel the Federal Reserve to consider raising interest rates instead. The report highlights not only surging oil prices but also increasing shipping costs for key commodities like fertilizer and aluminum, which could contribute to wider inflationary pressures across the U.S. economy.
Despite U.S. President Donald Trump’s demands for lower benchmark interest rates, the ongoing conflict in Iran may shift the Fed’s policy considerations. In a note issued earlier, Bank of America’s economists identified specific conditions that might prompt the central bank to adopt a more restrictive monetary policy stance. These conditions include an extended tenure for Fed Chair Jerome Powell, a sustained unemployment rate below 4.5%, and emergent price pressures due to rising energy costs.
Recent market movements reflect uncertainty, with Bitcoin trading below $70,000 after peaking at $75,600 earlier in the week. Following the initiation of hostilities in the Middle East, Bitcoin saw a significant drop, falling to $63,000. Analysts suggest that if the Fed were to unexpectedly increase interest rates, risk assets such as stocks and cryptocurrencies would likely experience immediate negative repercussions. However, some experts believe Bitcoin could ultimately benefit, emerging as a protective asset against currency devaluation, similar to gold.
James Butterfill, head of research at CoinShares, emphasized the potential swift outflows from crypto-focused exchange-traded funds, which could serve as a warning sign of the impact a rate hike would have on the market. He noted that while the initial response to a rate hike might be unfavorable for Bitcoin, the ongoing economic conditions could lead to a resurgence in its value as investors seek safe havens during periods of stagflation.
Meanwhile, Bank of America’s report noted that sustained high oil prices, spurred by ongoing geopolitical tensions, could meet the conditions for a rate hike. They defined a ‘sweet spot’ for oil prices between $80 and $100 per barrel, emphasizing that the potential for prolonged disruptions in supply chains could further escalate inflation.
Market predictions surrounding Brent crude oil suggested a 67% probability of prices reaching $120 per barrel, with traders estimating an 11% chance of a ceasefire in Iran within the month. While Bank of America economists still predict two rate cuts of 25 basis points this year, traders’ sentiments appear cautious, looking ahead to mid-2027 for any rate hikes.
Zach Pandl from Grayscale stated that the Fed is not likely to raise rates soon unless rising oil prices lead to sustained inflation expectations. The Fed’s traditional approach tends to overlook volatile food and energy costs, focusing instead on more stable indicators of inflation.
The current inflation rate exceeds the Fed’s target, with a noted 2.8% increase in January compared to the previous year. Presently, Bitcoin’s valuation has markedly decreased from its all-time high of $126,000, although it has shown resilience, attributed to improving market sentiments and ongoing developments in the realm of stablecoins and tokenization.
As Powell’s term is set to conclude in May, he plans to continue in his role until a successor is confirmed by the Senate. Observations from economists indicated that Powell may adopt a less dovish approach than his potential successor, Kevin Warsh, which could influence decisions on future interest rate hikes. The next opportunity for policy changes is anticipated in June, as pressures from energy prices, inflation, and economic growth continue to shape discussions around monetary policy.
