Market Reprices Rate Hike Expectations Amid Inflation and Geopolitical Concerns Reshaping Fed's Path

On March 29th, “describing the recent shift in market expectations for central bank monetary policy as a ‘180-degree turn’ seems insufficient.” Just a few weeks ago, the market was anticipating multiple interest rate cuts by the Federal Reserve in 2026. Now, it has clearly begun to price in the possibility of a rate hike this year.

Latest data from the CME FedWatch Tool shows that the probability of the federal funds rate being higher than the current range of 3.50%-3.75% by the end of this year is approaching 30%, while the probability of a rate decrease has fallen to 2.9%.

This shift in expectations is primarily driven by inflation concerns stemming from the energy market. Since the escalation of tensions in the Middle East in late February, Brent crude oil prices have risen from around $70 per barrel to approximately $111 per barrel currently. Concurrently, long-term U.S. Treasury yields have also surged significantly, with the 10-year Treasury yield climbing from below 4% a few weeks ago to around 4.40%.

The newsletter “Crypto is Macro Now” pointed out: “Food and energy prices will unfortunately continue to rise and remain at high levels for some time, at least until the issues with Middle East shipping disruptions are resolved. Even if a peace agreement were reached tomorrow (which is unlikely), it would still take months to see any relief.”