Financial markets are increasingly convinced the Fed's next move will be to raise interest rates, not cut them.

The threat of inflation has worsened this month since the U.S. attacked Iran, driving up energy prices, putting pressure on the Fed to keep rates higher for longer or even raise them.

President Donald Trump's efforts to oust Fed Chair Jerome Powell could backfire, delaying the day that a Fed chair more favorable to rate cuts takes charge of the central bank.

Two conflicts are dashing hopes that the central bank will lower its key interest rate anytime soon.

The war in Iran has pushed up oil prices, stoking inflation fears and pressuring the Fed to scrap its recent plans to cut interest rates in the year ahead.

Meanwhile, the administration is investigating Fed Chair Jerome Powell over renovations to the central bank's building, in a move some say is an attempt to strongarm officials into cutting rates. Some traders expect the move may backfire, keeping Powell in charge of the central bank past the end of his term in May, and delaying his replacement by his more dovish successor, Kevin Warsh.

Amid all the tumult, financial markets are now pricing in around about a 27% probability that the Fed will raise its key interest rate at some point in 2026, according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That's compared to just an 9% of at least one cut.

Just a month ago, experts were speculating about how many times the Fed would cut rates to lower borrowing costs, encourage hiring, and prevent a serious rise in the unemployment rate.

The Fed opted to keep its key interest rate flat at a range of 3.5% to 3.75% at its meeting last week. After the meeting, Powell emphasized the central bank is facing risks on both sides of its dual mandate to keep inflation at a 2% annual rate and the unemployment rate low.

The Fed has been torn between cutting rates to prevent the job market from collapsing as hiring has slowed to a crawl last year, and keeping rates higher for longer to subdue inflation that's still running about a full percentage point above the Fed's target rate.

Higher interest rates mean higher borrowing costs, less consumer spending, and less hiring and business expansion: in other words, a slower economy.

Three things would have to happen for a rate hike to become a serious possibility, according to economists at Bank of America.

First, core inflation would have to rise. While economists expect overall inflation to rise because of soaring gas prices, core inflation measures deliberately exclude those volatile costs to provide a clearer picture of underlying trends. The Fed would likely need evidence that higher fuel costs are driving up transportation costs and pushing inflation across the board to seriously consider a hike, US economist Aditya Bhave wrote in a commentary.

Second, the job market would have to stay afloat. Otherwise, the Fed would face pressure to cut interest rates to bolster hiring and prevent the unemployment rate from spiking. The U.S. economy lost 92,000 jobs in February, suggesting the job market is in some trouble.

Fed Governor Christopher Waller said in an interview on CNBC Friday that he had been in favor of cutting rates last week after the dismal jobs report, but changed his mind after the Iran war broke out and oil prices spiked.

Lastly, Powell would likely still have to be governor, Bhave wrote. The Fed chair has so far resisted repeated demands from Trump to sharply lower interest rates. Trump's pressure campaign against Powell has included insults and threats to fire him. The Justice Department, which is part of the administration, also opened a criminal investigation into Powell over alleged cost overruns on a renovation project at the Fed's headquarters, which the chair and his allies have described as an attempt at intimidation.

Powell's term as chair ends in May, and Trump has nominated former Fed Governor Kevin Warsh, to take over the role. Warsh has advocated for rate cuts.

However, Republican Senator Thom Tillis has said he would block the nomination if the White House does not drop the charges against Powell. Powell said this week he would stay on as Fed Chair Pro Tempore until his successor is confirmed.

"We view Chair Powell as a moderate dove, who will prioritize the labor market over inflation if risks to the two are roughly balanced," Bhave wrote. "But he isn't nearly as dovish as Fed Chair nominee Warsh is likely to be. Therefore, we think the bar for hikes would be much higher under Warsh than Powell."

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