Federal Reserve Chair Kevin Warsh heads into this week’s policy meeting with traders increasingly pricing in a rate increase, as renewed fighting between Iran and the United States has driven crude oil above $100 a barrel and raised concerns that higher energy costs could feed inflation.

For central banks, oil shocks are difficult because they can lift near-term inflation while also raising costs for households and businesses. The Fed’s mandate requires it to pursue stable prices and maximum employment, so officials must weigh whether higher energy prices are likely to pass through into broader inflation or remain a temporary shock.

The meeting begins Tuesday and will be Warsh’s second as Fed chair. A week ago, futures markets put the probability of a quarter-point rate increase at below 10%. By Friday, that probability had risen to 36%.

Investors now fully expect one rate increase by September and are also pricing in one or two additional quarter-point increases over the next nine months. Oil prices have remained volatile since the war began in late February, with Washington and Tehran alternating between pauses and new attacks.

Traders had previously bet that any closure of the Strait of Hormuz would create only a temporary inflation shock, even though roughly one-fifth of the world’s oil normally moves through that route.

Oil prices push traders toward tighter Fed expectations

That view weakened after crude moved above $100. Investors sold government bonds in the United States and Europe, pushing bond prices lower and yields higher.

The 10-year U.S. Treasury yield reached its highest level in 18 months. Ten-year yields in Germany and France also rose to levels not seen in more than 15 years. Long-term yields typically rise when markets expect inflation to remain elevated.

Warsh has another reason to consider higher rates, based on the latest U.S. data showing a strong labor market. Weekly unemployment claims fell Thursday to their lowest level since 1969. Consumer inflation declined to 3.5% in June, but it remains well above the Fed’s 2% target. If the economy remains firm, layoffs stay low and oil prices remain high, officials may be less inclined to wait before tightening policy.

The combination leaves traders focused not only on the rate decision, but also on how officials describe inflation risks from energy and whether they emphasize the strength of the labor market. Those details can shape expectations even when the Fed avoids a direct signal about its next move.

Warsh has avoided giving explicit signals before policy decisions. In what he has described as a deliberate return to meeting-by-meeting decisions, he has supported ending advance guidance. “If we get policy right, and we will, the inflation surge of the last five years will be a thing of the past,” he told lawmakers this month.

Warsh has offered little beyond that. He has not said which inflation measure he prefers or which economic data he considers most reliable. Instead, he has asked internal task forces to review those questions. That marks a contrast with the Fed’s more open communications approach over the past 20 years.

Warsh keeps policy debates private as Congress seeks clearer answers

At his White House swearing-in ceremony in May, Warsh thanked former Fed Chair Alan Greenspan for being the first person to “show me what this role demands.”

Greenspan died last month at age 100 and was known for answers that often left listeners uncertain. He once joked, “If I seem unduly clear to you, you must have misunderstood what I said.”

Warsh testified before Congress for more than five hours this month but gave few definitive views. Some of his answers differed from earlier statements. Representative Ritchie Torres, a New York Democrat, read back part of Warsh’s April nomination testimony.

In that hearing, Warsh had spoken favorably about an inflation gauge that excludes the largest monthly price changes, rather than using the measure the Fed has relied on for years. When Torres asked about it, Warsh denied endorsing any single gauge.

“None of those are very good measures of underlying inflation,” Warsh said. “If I had a preferred measure, I wouldn’t have called for a task force to go back to first principles.”

Warsh has not committed to maintaining the press conference schedule used by his predecessor, Jerome H. Powell. Powell spoke after every policy meeting, explained how officials viewed the economy and outlined discussions within the rate-setting committee. Warsh’s communications task force is reviewing that schedule.

Reporters asked Warsh last month what would prompt the Fed to raise rates. He answered, “I can’t give any forward guidance about what we’re going to do next. The good news is, we’ll be meeting in six weeks,” referring to Tuesday’s meeting.

Warsh has said he wants every policy gathering to be a “family fight,” with officials debating privately rather than signaling the outcome before the meeting begins.