Why $4 a gallon gas prices wont trigger Fed interest rate hikes — and could lead to cuts

Gasoline prices over $4 a gallon, part of an ongoing supply shock in the energy markets, might seem like a cue for the Federal Reserve to raise interest rates to head off inflation. At least for now, that looks like a bad bet.

Investors instead expect the central bank to hold benchmark rates steady, or even pivot back toward cuts later in the year as policymakers weigh the risk that higher energy prices will slow growth more than they fuel lasting inflation.

In market-moving remarks Monday, Fed Chair Jerome Powell signaled that raising rates now could be the wrong medicine for an economy already facing a softening labor backdrop and elevated recession concerns on Wall Street.

Asked whether he thought policymakers should consider rate increases here, Powell responded: “By the time the effects of a tightening in monetary policy take effect, the oil price shock is probably long gone, and you're weighing on the economy at a time when it's not appropriate. So the tendency is to look through any kind of a supply shock.”

The comments come at a critical juncture for markets, which have struggled to get a handle on the Fed's intentions amid a bevy of conflicting and perpetually shifting economic signals.

Just a few days ago, traders began to entertain the possibility that the Fed's next move could be a hike. That mindset followed some unsettling inflation news: Import prices rose much more than expected in February, even ahead of the war-related oil spike, while the Organization for Economic Cooperation and Development raised its U.S. inflation forecast dramatically, to 4.2% for 2026.