Carson Group’s Sonu Varghese noted that options markets are pricing in a much higher probability of a rate hike in 2026 following the joint U.S.-Israel strikes on Iran in February.
- The strategist stated that Fed funds futures data show that the probability of the central bank not cutting rates in 2026 has increased from 5% before the Iran war to 39% now.
- ING Think economists echoed similar sentiments, saying the FOMC could push the expected rate cut into 2026 or 2027.
- Varghese also noted that inflation across the core PCE basket has worsened, with more than half of the items in the basket having inflation rates above 3% as of January 2026, up from 40% last year.
The Federal Reserve could start considering hiking interest rates once again amid a worsening inflation picture, with the Iran war making matters worse, according to Carson Group’s Chief Macro Strategist, Sonu Varghese.
In his latest note, Varghese highlighted that inflation in the core Personal Consumption Expenditures (PCE) price index has worsened over the past two years.
Rate Hike Probability Shoots Up
Varghese highlighted that the options markets are pricing in a much higher probability of a rate hike in 2026 after the joint U.S.-Israel strikes on Iran on Feb. 27, 2026.
“We have anything but price stability now, and the outlook doesn’t look great. Don’t be surprised if the Fed starts talking about the possibility of raising interest rates sooner rather than later,” the strategist added.
Varghese also stated that Fed funds futures data show that the probability of the central bank not cutting rates in 2026 has increased from 5% before the Iran war to 39% now.
Economists at ING Think echoed similar sentiments in a recent note, stating that they suspect the Federal Open Market Committee (FOMC) will trim growth forecasts, raise its inflation forecast, and delay the expected rate cut in 2026 to 2027.
Inflation Going The Wrong Way, Says Varghese
The strategist said that while 40% of the items in the core PCE basket had inflation rates above 3% in January 2025, that figure has now increased to 51% as of January 2026.
“The inflation picture was not pretty prior to the Middle East crisis. And it’s going to get a lot worse,” he said.
PCE is the Fed’s preferred inflation metric, and the central bank’s official long-term target is 2%. However, it has averaged 4% between 2021 and 2025, Varghese noted.
“Headline and even core numbers can hide what’s happening under the hood. Core inflation has certainly been pulled higher by tariff-impacted goods and even higher stock prices,” he added.
US Energy Independence Not Relevant, Varghese Says
The strategist added that while it is true that the U.S. is energy independent, it does not mean much, given that U.S. oil companies can sell to global customers.
As a result, the largest bids are setting prices that have surged amid a 10%–20% drop in global supply following the Strait of Hormuz closure, he added. Varghese stated that an export ban on oil and gas by the Trump administration would only make matters worse for U.S. oil producers, as they wouldn’t have anyone to sell to.
When Is FOMC’s Next Meeting Scheduled?
The FOMC’s two-day meeting is currently underway, and a rate decision is scheduled to be announced on Wednesday at 2 p.m. ET.
According to the CME FedWatch tool, there is a 99% probability of the interest rates remaining unchanged.
Meanwhile, U.S. equities gained in Wednesday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.45%; the Invesco QQQ Trust ETF (QQQ) rose 0.6%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) gained 0.44%. However, retail sentiment on Stocktwits regarding the S&P 500 ETF was in the ‘extremely bearish’ territory.
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