US Gasoline Prices Surge, Federal Reserve Sounds Rate Hike Warning

March 24, 2026

Word count: 1,968, estimated reading time: about 3 minutes

Author | First Financial Fan Zhijing

As the US and Israel escalate military actions against Iran, causing oil prices to soar, the Federal Reserve’s monetary policy outlook seems to shift from rate cuts to potential rate hikes. The imminent economic impact raises the question: will energy prices become the catalyst for the US to exit the Middle East quickly?

The Federal Reserve Stands Ready

Chicago Fed President Charles Goolsby said Monday that, given the impact of rising oil prices on the US economy, the Fed may need to tighten monetary policy. “All policy options are on the table, and interest rates could move in either direction. If inflation remains under control, we might return to a environment of multiple rate cuts this year. Conversely, if the situation worsens and inflation spirals out of control, I do not rule out the possibility of rate hikes,” he stated.

GasBuddy data shows that the average price at US gas stations for regular gasoline reached $3.95 last Saturday, the highest since August 2022, up over 30% from before the US-Iran conflict.

At last week’s Federal Open Market Committee (FOMC) meeting, the Fed kept interest rates unchanged and maintained the path for rate cuts this year; only a few officials suggested modifying the policy statement, hinting that the next move could be either a rate cut or hike. The Fed’s two main responsibilities are to stabilize inflation and maintain low unemployment. Oil shocks can easily trigger stagflation: on one hand, pushing up gasoline and food prices; on the other, weakening demand and dragging down the labor market. This puts the Fed in a dilemma: should it prioritize addressing a weak employment market or continue to combat rising prices?

Some economists expect the Fed may adjust its stance in the upcoming late-April meeting. Macro consulting firm SGH’s chief economist Tim Duy believes that if the Fed ultimately decides to hike rates, it would signify a major policy shift. Over the past few months, Fed officials have been highly focused on rate cuts.

Goolsby admitted that he is slightly more concerned about inflation than the labor market. “Inflation is already at an uncomfortably high level, well above target for a long time, and now we face the potential for sustained gasoline price shocks. This is precisely why the current economic situation is fraught with risks and urgent,” he said. This marks a significant change in stance. Before the US and Israel launched strikes against Iran, Goolsby had repeatedly stated that the Fed would eventually cut rates this year.

Nevertheless, several Trump-appointed officials still support rate cuts. Fed Governor Stephen M. Mullan said recently that he believes the Fed can still cut rates four times this year. Mullan noted that the traditional policy logic of the Fed is to ignore oil price shocks: although oil prices influence overall inflation, they do not feed into core inflation, which excludes food and energy. Only if long-term inflation expectations rise for over a year would a rate hike be warranted. “That’s not the case now. Gasoline prices haven’t triggered a wage-price spiral,” he said. “There are almost no signs of that. In fact, wage pressures have been easing in recent years.” Mullan was the only dissenter at last week’s rate decision, advocating for an immediate rate cut.

Last Friday, Michelle Bowman, Vice Chair for Supervision at the Fed, said, “I remain concerned about the labor market. Regarding the outlook for monetary policy, we expect to implement three rate cuts by the end of 2026 to support the labor market.” Bowman added that it’s too early to judge the long-term impact of current conditions on the US economy, and it’s difficult to determine how this should be reflected in long-term economic forecasts or how future rate adjustments might be considered in upcoming policy meetings.

Markets Still Pricing In Changes

US President Donald Trump has been exerting strong pressure on Fed Chair Jerome Powell to cut rates. However, as the US-Iran conflict enters its fourth week, bond markets are beginning to signal rate hikes. Short-term interest rate futures are now pricing in the possibility of the Fed raising rates by the end of the year. Less than three weeks ago, markets expected a total of 60 basis points of rate cuts this year. The Iran conflict has not only completely reversed this expectation but has also turned it around.

Last Thursday, the yield on the 2-year US Treasury surged 12 basis points to 3.92%, the largest single-day increase since April 2025. This movement marked a major re-pricing in the market. Since the beginning of this month, the 2-year Treasury yield has risen by 54 basis points—its largest increase since February 2023, when the Fed was in the midst of its most aggressive tightening cycle in four decades.

Earlier Monday, Polymarket showed that the probability of the Fed raising rates in 2026 had risen to 24%. CME’s FedWatch tool indicated a 40% chance of at least one rate hike by October. After Trump temporarily delayed military action against Iran, the probability of a rate hike this year remained close to 15% at the time of reporting.

US Bank economist Adia Bave outlined three key conditions the Fed would need to see before seriously considering a rate hike:

First, a stable labor market. Despite the economy slipping into technical recession in 2022, the Fed persisted with rate hikes due to unemployment being below 4% and continuing to decline. Mild employment growth, stable initial jobless claims, and steady job openings would support a rate increase.

Second, core inflation surpassing 3.2%. Every $10 increase in WTI crude oil prices could, in the long run, add about 7 basis points to core inflation. If the Iran conflict spreads to shipping, natural gas, fertilizers, and aluminum, causing supply disruptions similar to 2021-2022, core inflation could reach 3.2%.

Third, Powell remains at the helm of the Fed. Nominee Kevin W. Waugh has yet to be confirmed by the Senate. Bave believes Powell is a dovish moderate who prioritizes the labor market when balancing risks—much more so than the upcoming hawkish nominee Waugh, who has recently emphasized the urgency of rate cuts.

His conclusion is that rate hikes require multiple conditions to be met simultaneously, but these conditions are not out of reach.

According to the schedule, the CPI report on April 10 could become one of the most important economic data releases in years. If the data shows 3.4% or higher, and the Middle East tensions keep oil prices elevated, market focus may shift from “Can the Fed hike rates?” to “When will the Fed hike rates?”