Markets move to price in rate hikes as inflation fears and geopolitics reshape Fed expectations

Market sentiment has undergone a significant reversal, with expectations shifting from multiple Federal Reserve rate cuts in 2026 to a growing possibility of rate hikes. Current pricing indicates a nearly 30% chance that the fed funds rate will end the year higher than its current 3.50%-3.75% level, while the odds of rate cuts have plummeted to 2.9%.

Drivers of the Shift

This change is primarily driven by resurgent inflation fears, exacerbated by escalating tensions in the Middle East. The price of Brent Crude oil has surged from approximately $70 per barrel to $111 since late February. This surge has contributed to a sharp rise in long-term Treasury yields, with the 10-year yield climbing to 4.40% from below 4% just weeks ago.

According to the Crypto is Macro Now Newsletter, elevated food and energy prices are expected to persist until Middle East shipping disruptions are resolved. Even a swift peace deal would likely take months to impact global supply chains. Furthermore, core inflation in February remained above the Fed's 2% target at a 2.5% year-over-year pace, and longer-term inflation expectations also exceed the target, with 5-year and 10-year measures at 2.5% and 2.3% respectively.

The newsletter also noted that higher energy prices and increased military spending are expected to stimulate the U.S. economy, potentially preventing a sharp GDP decline.

Asset Performance Amidst Volatility

Bitcoin has shown resilience, trading within the $65,000-$70,000 range despite the geopolitical events. However, a closer examination reveals a different story when considering longer time frames. While gold has fallen approximately 20% since recent U.S. attacks in the Middle East, it had previously experienced a historic run, more than doubling in price over the preceding year. Similarly, the Nasdaq, which recently entered correction territory, had reached near record highs, up 50% from its April 2025 lows.

In contrast, Bitcoin was down about 50% from its early October 2025 record. Therefore, on any timeframe longer than the shortest term, Bitcoin has significantly underperformed key assets like stocks and gold.