03:58 PM EDT, 07/23/2026 (MT Newswires) -- Resurging oil prices are fanning worries about inflation, driving up the likelihood that the Federal Reserve could raise interest rates as soon as next week.

Crude prices rallied on Thursday, with Brent crossing the $100-per-barrel level for the first time since May. Oil was on track for monthly gains of more than 30% amid a widening conflict in the Middle East that could lead to a more severe global supply disruption.

The rebound in oil prices comes ahead of the Fed's July 28-29 monetary policy meeting.

The odds of a quarter-percentage-point increase in the Fed policy rate next week rose to 36% from 12% a week ago, according to the CME FedWatch tool. There's a 64% probability that the Fed will leave its rate unchanged.

"Rising oil prices have revived talk of a Fed rate hike, with rates markets now beginning to treat next week's meeting as a live decision after the 10-year yield pushed back toward its year-to-date high," Saxo Bank said in a report Thursday.

Treasury yields surged intraday Thursday, with the the 10-year rate rising 4.6 basis points to 4.7%.

Earlier this week, Yemen's Iran-aligned Houthis announced a blockade of Saudi Arabian ports and ships in the Bab al-Mandeb Strait, which connects the Red Sea to the Gulf of Aden and Arabian Sea. It is an alternative route to the Strait of Hormuz, which remains effectively closed due to escalating tensions between the US and Iran.

The situation adds risk premium to crude, putting the focus back on inflation, Saxo Bank said.

Some Fed officials recently expressed concerns about persistent price pressures, with Dallas Fed President Lorie Logan pushing for "modestly higher" interest rates. Fed Governor Lisa Cook said inflation is more likely to accelerate than cool given an artificial intelligence boom and supply shocks.

While the Federal Open Market Committee is expected stay put for some time, a flare-up between the US and Iran poses upside risks to inflation, Stifel said in a report e-mailed to MT Newswires.

"With the conflict ramping back up overseas and creating a renewed threat of potential upside risk to prices, the pendulum has now seemingly shifted back into the hawkish camp," Stifel Chief Economist Lindsey Piegza wrote.

The Federal Open Market Committee kept interest rates steady in June for the fourth consecutive meeting. However, Fed officials held diverging views on the appropriate path of interest rates, according to the minutes of that meeting released in July.