A “180” hardly does justice to the recent shift in market expectations for central banks’ monetary policy.
With expectations of more interest rate cuts from the Federal Reserve in 2026 just a few weeks ago, markets have begun pricing in rate hikes this year in earnest.
The current pricing on the CME FedWatch Tool shows almost a 30% chance that the fed funds rate will be higher by the end of the year than its current level of 3.50%-3.75%. The chances that interest rates may fall have meanwhile plummeted to 2.9%.
The shift is largely driven by renewed inflation fears linked to the energy markets. Since the escalation of tensions in the Middle East in late February, the price of Brent crude oil has risen from around $70 a barrel. barrel to the current level of $111. That has helped send yields at the long end of the Treasury curve sharply higher, with the 10-year yield rising to the current 4.40% from below 4% weeks ago.
“Food and energy prices are tragically going to rise and stay high for a while, at least until the complete mess in Middle East shipping is sorted out,” according to the Crypto is Macro Now Newsletter. “Even if a peace agreement were to be reached tomorrow (unlikely), it would take months at best.”
Even before the oil spike, inflation was still running well above the Fed’s 2% target. Core inflation in February came in at a 2.5% pace year-on-year and has not fallen below that 2% level since April 2021.
Longer-term inflation expectations also remain above target, with 5-year and 10-year targets at 2.5% and 2.3%, respectively, suggesting markets expect inflation to exceed the Federal Reserve’s mandate beyond the immediate term.
“The US economy as a whole will obviously benefit from higher energy prices as it is a net exporter,” Crypto is Macro Now continued. “And military spending will shoot up to rebuild hardware and add further stimulus. Both sectors should help keep GDP from falling sharply.”
Bitcoin is doing better, but there is more to the story
Still holding in the $65,000-$70,000 range, bitcoin by holding roughly steady, has – on paper – fared better since the start of the Iran war.
Gold, for example, is down about 20% since the US attacks began, while the Nasdaq entered correction territory on Friday, falling more than 10% from its 2026 highs.
But consider what came before. Gold in early March was in the middle of a historic run higher, and the price has more than doubled from the previous year. The Nasdaq was also near an all-time high, up 50% from its April 2025 low. Bitcoin, meanwhile, is down about 50% from its early October 2025 high.
Taken on all but the shortest time frames, bitcoin continues to significantly underperform key assets such as stocks and gold.
