Markets are now pricing a 25 percent chance that the Federal Reserve will raise interest rates at its July 29 meeting, according to the CME FedWatch Tool. That is a one-in-four probability. A month ago, most investors assumed rates would stay put.

What changed? The short answer is oil, and the war behind the oil price spike. The FedWatch tool, tracked by CME Group, put those 25% hike odds on the July 29 meeting as of July 7, and the tool was last updated July 21 at 7:00 PM CT. MarketWatch flagged the rising likelihood in a July 22 headline tying it directly to the intensifying Iran crisis.

The situation overseas has worsened this month. Iran declared the Strait of Hormuz closed and expanded attacks on Gulf states following U.S. strikes, Reuters. The Strait of Hormuz is a narrow waterway where about a fifth of the world's oil passes through. The U.S. said it hit hundreds of Iranian targets after ship attacks. On July 16, Reuters reported that Trump ramped up U.S. air strikes on Iran as a ceasefire unraveled, Reuters. Secretary of State Marco Rubio said on July 22 that the U.S. remains willing to negotiate over the Iran crisis but that Tehran is not serious about talks, Reuters.

Oil prices have been the most visible result. Trading Economics reported U.S. crude at $87.10 per barrel on July 22, up 3.27% on the day. Over the prior month, crude had risen 18.98%, and over a longer comparison window it was up 33.49%, Trading Economics. Robinhood offered a prediction market for the July 22 oil price settle with a threshold above $86.99, Robinhood. Polymarket ran a July oil price event with "$85 or above" as the leading outcome at 100% probability as of June 25, Polymarket. The IEA, cited by Reuters on July 10, warned that the U.S.-Iran escalation could threaten the 2027 oil market surplus forecast, Reuters.

Higher oil prices ripple into the bond market. The interest rate the U.S. government pays on 10-year loans, called the 10-year Treasury yield, closed at 4.60% on July 21 and then at 4.63% on July 22, according to YCharts. The Financial Times reported 4.66% on the same day, data as of 18:55 BST. For context, the 10-year finished at 4.55% on July 17, Advisor Perspectives. The long-term average for the 10-year Treasury rate sits at 4.25%, YCharts. That means the current rate is running roughly 0.38 to 0.41 percentage points above the long-run norm.

The small difference between the two July 22 readings — 4.63% versus 4.66% — comes down to timing. YCharts captures the settlement close. FT's figure is a snapshot from earlier in the day, before U.S. markets finished trading.

Here is why all of this matters for your money. When oil prices surge because of a war, it pushes up the cost of gasoline, heating, and shipping. That feeds into inflation. At the same time, higher energy costs can slow down the economy because businesses and consumers spend more on fuel and less on everything else. Economists call this combination — rising prices alongside weakening growth — stagflation. It is the hardest scenario for the Fed to handle, because raising interest rates to fight inflation could further damage an already slowing economy. Reuters reported on July 21 that this stagflation premium was quietly mounting in financial markets, Reuters.

The 25% odds are not a prediction. They are a probability derived from trading in financial contracts, and those odds can swing on trading activity that does not necessarily reflect a real consensus about what the Fed will do. But the direction matters. A month ago, investors were debating how many times the Fed would cut rates this year. Now they are entertaining the possibility that the next move could be a hike, not a cut. That is a notable shift in expectations, even if a hike is not the most likely outcome.

The key variable to watch is the oil price. If the Strait of Hormuz stays closed and crude climbs beyond $87, the pressure on inflation and borrowing costs widens across the economy. Rubio's July 22 statement that the U.S. is still willing to negotiate but Tehran is "not serious about talks" narrows the path to a quick resolution. The IEA's warning about the 2027 surplus forecast adds another layer: if the supply disruption persists, the oil cushion markets expected for next year erodes.