A “180” hardly does justice to the recent shift in market expectations regarding central bank monetary policy.
Expecting multiple rate cuts from the Federal Reserve in 2026 just weeks ago, markets have begun in earnest to price in rate hikes this year.
Current prices on CME FedWatch Tool show that there is almost a 30% chance that the federal funds rate will be higher at the end of the year than its current level of 3.50% to 3.75%. Meanwhile, the odds of rates falling have collapsed to 2.9%.
This change is largely explained by renewed inflationary fears linked to energy markets. Since tensions in the Middle East escalated in late February, the price of Brent crude oil has fallen from around $70 per barrel to its current level of $111. This has helped push yields at the long end of the Treasury curve sharply higher, with the 10-year yield rising to 4.40% currently, up from less than 4% a few weeks ago.
“Food and energy prices will tragically spike and stay high for some time, at least until the complete Middle East shipping mess is sorted out,” according to Crypto is Macro Now Newsletter. “Even if a peace deal were to be reached tomorrow (unlikely), it would take months at best.”
Even before oil’s gains, inflation was still well above the Fed’s 2% target. Core inflation in February stood at a pace of 2.5% year-on-year and has not fallen below this 2% level since April 2021.
Long-term inflation expectations also remain above target, with 5-year and 10-year measures at 2.5% and 2.3%, respectively, suggesting that markets expect inflation to exceed the Federal Reserve’s mandate beyond the immediate term.
“The U.S. economy as a whole will of course benefit from rising energy prices because it is a net exporter,” Crypto is Macro Now continued. “And military spending will increase significantly to replenish supplies, adding further stimulus measures. Both sectors should help prevent a sharp drop in GDP.”
Bitcoin outperforms, but there is more to say
Bitcoin still in the $65,000-$70,000 zone remaining roughly stable, has – on paper – outperformed since the start of the war in Iran.
Gold, for example, is down around 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. In early March, gold was in the midst of a historic rally, with its price more than doubling from the previous year. The Nasdaq was also near an all-time high, up 50% from its April 2025 lows. Meanwhile, Bitcoin was down about 50% from its early October 2025 all-time high.
Taken over time frames other than the shortest, bitcoin continues to significantly underperform key assets like stocks and gold.
