According to a research report from GLMS SEC, while market expectations for a Federal Reserve interest rate hike within the year have intensified rapidly, the bank believes the actual probability of a hike remains low. Despite resurgent inflation concerns, the US labor market is showing signs of weakness, with the core measure of new non-farm payrolls near zero and the unemployment rate trending upwards. Furthermore, the rise in oil prices lacks the fundamental drivers for sustained transmission into broader inflation. On the supply side, US energy self-sufficiency has improved, while on the demand side, the economy is relatively weak, fiscal stimulus is receding, and a wage-price spiral has not materialized. The bank points out that historical precedent indicates the Fed typically requires strong employment and stable inflation expectations to initiate a hiking cycle, conditions which are not currently met. A rate hike now would exacerbate the risk of a "K-shaped" economic divergence, negatively impacting AI investment and middle-to-low income households, potentially shifting market focus from "stagflation" to "recession." GLMS SEC added that restarting rate hikes this year would require a confluence of multiple factors, including persistent high oil prices due to geopolitical conflicts, fiscal expansion to bolster demand transmission, and a shift in the policy stance of the Fed's leadership—all of which are difficult to achieve currently.
Key views from GLMS SEC are as follows:
In just a few weeks, market expectations for liquidity for the remainder of the year have reversed sharply. Amid persistent tensions in the Persian Gulf and sustained high international oil prices, inflation risks have resurfaced. Major central banks have generally held policy steady this month, some even signaling a hawkish stance, leading to a rapid reversal of previous easing expectations. The risk of a global return to a tightening cycle has increased significantly, with liquidity tightening pressures becoming more prominent. Most major asset classes, except for crude oil and the US dollar, have experienced sharp corrections. Similarly, expectations for the Fed have shifted dramatically; at the start of the year, the market broadly anticipated about two rate cuts in 2024. However, with inflation concerns re-emerging, policy expectations have turned significantly, and the market has even begun pricing in the possibility of renewed rate hikes. Market expectations often exhibit linear extrapolation inertia and are prone to subsequent swings. If the current rapidly heating hike expectations are corrected later, the resulting reverse adjustment momentum in the market could be substantial.
So, is there a possibility of the Fed raising rates again this year? We believe the probability is low. The threshold for the Fed to restart hiking is currently high, constrained by multiple factors. Maintaining the current interest rate is likely its policy baseline. Against a backdrop of economic weakness and impeded inflation transmission, continuing with rate cuts within the year remains a plausible scenario.
Specifically: 1. **Historical Perspective: How has the Fed embarked on hiking cycles?** Reviewing past cycles reveals that, based on the dual mandate of employment and inflation, the Fed typically exhibits certain characteristics before initiating hikes: 1) A consistently recovering job market and tight labor supply, underpinning economic resilience, often serve as crucial prerequisites. Since the 1970s, the 3-month average of new non-farm payrolls before hike cycles typically hovered around 200,000, with unemployment trending downward, providing solid fundamental support for monetary tightening. 2) While the inflation level is a key consideration, inflation expectations are equally important, determining the urgency and intensity of tightening. The Fed does not always hike following a clear inflation rebound; after economic stabilization, even with mild short-term inflation, it might engage in preemptive hikes due to concerns about wage stickiness and future inflation spikes—here, expectations are more critical. During major supply shocks like the 1973 and 1977 oil crises and the 2022 global supply chain and energy disruptions, the Fed's response was often lagging, with rate increases moving in sync with or even lagging behind price rises.
The current macro environment differs markedly from historical hiking cycles. On one hand, the US labor market shows persistent weakness, with an unstable recovery foundation. With the core measure of new non-farm payrolls near zero and unemployment rising, a Fed rate hike now would lack policy support and could further damage the fragile job market, increasing downward economic pressure. On the other hand, despite short-term inflation worries, inflation expectations remain relatively stable. We believe the core reason is that the current rise in international oil prices lacks the key foundations for sustained inflation transmission on both the supply and demand sides. Compared to the energy price shocks of the 1970s oil crises and the 2022 Russia-Ukraine conflict, which led to persistent inflation diffusion due to unique supply constraints and strong demand-side stimulus—conditions absent today.
Specifically, the 1970s US stagflation stemmed from supply shocks combined with insufficient policy resolve, ultimately de-anchoring inflation expectations. Even before the oil crises, inflation risks were apparent. Under the long-standing post-WWII Keynesian stimulus framework, the government pursued expansionary fiscal and monetary policies to maintain high growth and full employment: the "Great Society" welfare plan significantly expanded fiscal spending, raising the deficit ratio in the mid-to-late 1960s; meanwhile, the Fed maintained loose liquidity, with rapid money supply growth fueling overheated demand and rising inflation expectations, without timely tightening. Subsequent anti-inflation efforts also lacked resolve. Ultimately, a series of 1970s supply shocks completely unmoored expectations. The OPEC oil embargo caused severe crude shortages. As a net importer heavily reliant on foreign supply with weak energy self-sufficiency, rising oil prices directly increased production costs across US industries, forcing price hikes and triggering broad inflation. Strong unions contributed to sticky wages, further raising costs and pushing prices higher, creating an inflationary spiral.
The 2022 high US inflation resulted more from a resonance of post-pandemic demand overheating and a tight labor market. While the Russia-Ukraine conflict disrupting global energy supply was a key external trigger, the fundamental driver was the ultra-large-scale fiscal and monetary stimulus during the pandemic, which provided demand-side support for cost pressures to transmit downstream. The concentrated release of excess household savings led to transient consumer demand overheating, coupled with high wage growth from a tight labor market (due to a pandemic-induced plunge in participation), causing cost pressures to rapidly spread to goods, services, and rents, culminating in the broadest high inflation in decades. Inflation structure trends confirm this: US energy inflation peaked and fell rapidly in 2022, pulling down goods prices, but core CPI components like housing didn't decline until mid-2023, indicating that overheated service demand fueled by fiscal stimulus was key to the inflation's persistence.
Currently, both supply-side shock resistance and demand-side transmission dynamics differ fundamentally from previous cycles. On the supply side, the US's changed role in the global energy landscape fundamentally weakens the diffusion of oil price increases into inflation. The shale revolution increased US crude self-sufficiency, making it a net exporter, significantly enhancing resilience to geopolitical supply disruptions and making sustained energy shortages unlikely. Additionally, crude export earnings can offset rising corporate costs, dampening price hike incentives. Furthermore, rapid adoption of new energy sources and improved industrial energy efficiency have reduced the overall economy's reliance on oil, and the weight of the energy component in the CPI basket has declined, lessening its impact on overall inflation. Concurrently, the absence of a wage-price spiral mechanism is a key factor containing sustained inflation diffusion from the cost side. With the US labor market cooling, job vacancies narrowing, and union influence and wage stickiness decreasing, no significant positive feedback loop between wages and inflation has formed, effectively preventing a cost-push spiral from broadly raising prices.
On the demand side, a weak economic structure struggles to support the smooth transmission of oil price pressures downstream. Although the Fed has begun an easing cycle, the policy rate remains significantly above neutral, keeping overall monetary conditions tight and still suppressing consumer durables, investment, and the housing market. Meanwhile, high US government debt and limited fiscal space mean large-scale demand stimulus is receding, significantly reducing fiscal support for aggregate demand. Within the context of a "K-shaped" US economy, the current oil price rise lacks broad-based demand配合, making it difficult to evolve from an energy-specific issue into a comprehensive, persistent price pressure. Particularly under high interest rates, core inflation components like housing are still on a downtrend, further weakening overall inflationary momentum and providing crucial demand-side support for stable inflation expectations. Historical review also shows that since the 1970s stagflation, the secondary pull-through effect of oil price volatility on core inflation has significantly weakened, thanks to energy structure transformation, strengthened Fed discipline, and labor market flexibility. Especially without strong demand-side support, oil price shocks are less likely to generate sustained inflation transmission momentum. Therefore, facing such supply shocks, the Fed's traditional policy logic is usually to look past short-term, transitory inflation increases and wait for more complete transmission, a steady core inflation rebound, or a clear rise in inflation expectations—signaling a clear "secondary inflation" effect—before considering hikes, primarily because the persistence of short-term supply-side transmission is uncertain and economic slowdown often counteracts inflation. This time is no exception. Given the weak labor market and inefficient inflation transmission, the US lacks the conditions for a hike this year. Furthermore, with significant uncertainty in Middle East geopolitics, unclear sustainability and trajectory of international oil prices, and volatile policy signals from the Trump administration, a premature Fed hike could lead to market expectation chaos and significant financial volatility if oil prices subsequently fall, ultimately harming economic stability.
2. **The Cost of Hiking? From "Stagflation" to "Recession" Trade** Beyond the stringent conditions for hiking, the cost is also difficult for the US economy and the Trump administration to bear. Against a backdrop of increasing fragility in the US economy and financial markets (excluding AI), a hasty rate hike could significantly negatively impact the economy. The market's current pricing of a "stagflation" trade may be short-lived, with a high likelihood of eventually evolving into a "recession" trade. As previously noted, the core issue of the current US economy is "K-shaped" divergence, a fundamental problem for the Trump administration in an election year. It must balance maintaining AI investment's support for the economy and the stock market's boost to consumption, while also sustaining fiscal expansion to "protect livelihoods." An interest rate increase would clearly negatively impact both.
Firstly, regarding AI investment: although the AI industry is still in its implementation phase and may not yet constitute an asset bubble, market concerns over high valuations and rapid gains have emerged multiple times. The overall fragility of tech stocks has increased significantly, making them highly sensitive to policy and liquidity changes, prone to sharp swings with minor triggers. A rate hike could foster persistent negative expectations, leading to a rapid decline in risk appetite. This would not only trigger tech stock valuation corrections (the "MAG7" account for over 30% of the S&P 500's market cap), directly reducing the wealth effect for households, but also potentially cool AI sector investment and financing, leading to capital expenditure contraction. This logic is not isolated; the historical lesson from the 2000 dot-com bubble is highly instructive. During liquidity tightening and rising rate cycles, high-valuation growth sectors are often the first hit, as prior valuation expansion driven by liquidity becomes unsustainable. If combined with disappointing earnings, it can easily trigger a "double whammy" of valuation and earnings compression, synchronizing a downturn in capital markets and industrial investment. In 2000, as the Fed hiked consecutively, valuations of tech leaders like Cisco, Microsoft, and Intel collapsed rapidly, stock prices plunged, the growth narrative for the new economy was swiftly corrected, capex contracted significantly, and falling risk appetite and slowing industrial investment reinforced each other in a negative feedback loop. Similarly, AI investment is now crucial for US growth, becoming an indispensable component. As of Q4 2025, AI-related investment contributed 1.07% (4-quarter moving average) to the US economy's annualized quarterly growth, accounting for roughly half of total growth. If rising rates trigger rapid corporate investment contraction, it could significantly amplify economic downward pressure, becoming a major driver towards recession.
Secondly, the "double squeeze" effect of rate hikes and rising oil prices would significantly increase living costs and debt servicing pressures for middle-to-low income groups, potentially leading to deeper livelihood difficulties. The economic situation for these groups is already more fragile. As revealed in prior analysis, they have clearly lagged in economic growth, making livelihood pressures a core pain point. Against this backdrop, a resonance between oil price increases and a hiking cycle would be particularly damaging. Rising oil prices directly increase basic living expenses like transportation and heating, eroding already shrinking disposable income, while rate hikes mean higher interest payments on mortgages, credit card debt, etc., further squeezing household financial flexibility. The combination could force these families to cut essential consumption, delay major purchases, and even push them towards debt default, posing a substantive threat to their quality of life and balance sheets—a significant political liability in an election year. According to Dallas Fed estimates, a closure of the Strait of Hormuz would significantly impact the Q2 2026 economy, potentially dragging growth down by 2.9 percentage points in a single quarter. While short-term reopening allows for activity rebound, the substantive supply chain shock is already felt; declining global supply chain efficiency and subsequent inventory disarray will inevitably hamper the extent and timing of economic recovery. If combined with rate hikes, the resonance of supply shock and tightening financial conditions could push the US economy into a severe slowdown.
Therefore, whether due to economic downward pressure or political considerations, the cost and resistance associated with hiking are undoubtedly substantial for the current administration.
3. **Potential "Signposts" for a 2024 Rate Hike?** What conditions could potentially trigger a Fed hike this year? We believe restarting hikes would likely require resonance across inflation sources, demand transmission, and policy constraints: Regarding inflation sources, a prolonged stalemate in the Middle East keeping oil prices persistently high at $100-120 or even higher. Static models suggest US inflation could rebound above 3.5% this year; more critically, if geopolitical conflicts persist and supply disruptions remain unresolved, sustained energy price increases could ignite medium-to-long-term inflation expectations, which is more crucial for a Fed pivot than a mere inflation reading rebound. For transmission mechanisms, the Trump administration might need to introduce more forceful fiscal expansion policies to unblock demand bottlenecks. In an election year, if large-scale fiscal stimulus akin to the Biden era is implemented—through direct payments, tax cuts, and promised affordability support—boosting disposable income and quickly activating end-demand, it could打通 the chain for oil price transmission to downstream investment and consumption, becoming the biggest risk source for secondary inflation this year. Regarding policy constraints, whether Fed leadership maintains policy independence is a key condition. Compared to the previous chair, the current leadership's stance appears more dovish, having publicly inclined towards lowering rates to around 3%, showing relatively weaker resolve against inflation. Under White House pressure, a shift towards tightening is questionable. Additionally, the Fed leadership transition itself poses a potential risk; if the new leadership is not confirmed by the Senate, the previous chair continuing as interim head could increase the probability of a hike this year.
Therefore, synthesizing these three conditions, key indicators to watch this year include marginal changes in inflation expectations (oil price persistence), the timing and effectiveness of fiscal policy rollout, and subsequent policy statements and inclinations from the Fed leadership. These variables will collectively influence whether, and how, the Fed shifts policy this year. However, at least currently, given the difficulty of meeting these conditions, the hurdle for a Fed rate hike in 2024 remains high.
Risks: US inflation proves more persistent than expected; tariff effects exceed expectations; geopolitical conflicts escalate and oil prices rise significantly; US fiscal policy is more expansionary than expected; potential errors in data estimates.
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