U.S. Treasury Turmoil Shatters Rate Cut Hopes! Market Expectations Reverse: Fed Rate Hike Probability Rises to 43% This Year
According to Zhitong Finance, the continued rise in US Treasury yields has completely changed market expectations regarding the timing of the next Federal Reserve rate hike. Data from prediction market platform Kalshi shows that traders believe there is a 63% probability the Federal Reserve will raise rates before July 2027, and a 43% probability of a rate increase this year. On another prediction platform, Polymarket, traders see a 35% chance of a rate hike in 2026.
Turbulence in US Treasuries Shatters Rate Cut Dreams, the “Ghost of Rate Hikes” Reappears
Although former US President Donald Trump’s original intention in nominating a new Federal Reserve Chair was to promote rate cuts, his nominee, Kevin Warsh, may initiate the first Fed rate-hike cycle since 2023.
Driven by surging Treasury yields, higher inflation, persistent tensions with Iran, and no clear signs of oil prices retreating, market expectations for Federal Reserve rate hikes have surged sharply in the past 24 hours. Previously, traders placed only a 50% probability on a rate increase in the first half of 2027.
The likelihood of a Federal Reserve rate hike before July 2027 has risen significantly
As rate hike expectations heat up, the new Federal Reserve Chair, Warsh, will be sworn in this Friday, succeeding Jerome Powell.
Trump nominated Warsh as Fed Chair at the end of January, after previously criticizing Powell for not cutting rates fast enough. Since then, expectations for rate cuts have faded. The resilient job market and resurging inflation have led many economists to downgrade their rate-cut forecasts, and multiple Federal Open Market Committee (FOMC) members clearly stated in the last meeting that they have no intention of signaling rate cuts in the future.
Constantly rising US Treasury yields have prompted investors to reassess the outlook. On Tuesday, the 30-year US Treasury yield climbed to its highest level since 2007.
Ed Yardeni, chief investment strategist at Yardeni Research and proponent of the “bond vigilantes” concept, said on Monday that the bond market may have more influence on monetary policy than the soon-to-be-inaugurated Chair Warsh.
He said: “Who is actually steering the direction of monetary policy? The answer is undoubtedly the bond market vigilantes.”
However, Chris Senyek, chief investment strategist at Wolfe Research, offered a different perspective in a Tuesday report, suggesting that bond market volatility could force a breakthrough in the Middle East situation, thereby easing upward pressure on inflation.
He stated: “We think the US Treasury market has been signaling high inflation, and this week’s trends are the straw that breaks the camel’s back. Our judgment is that the bond vigilantes may push Treasury yields higher in an attempt to pressure the Trump administration to quickly resolve the Iran issue.”
Trump “Retracts” Rate Cut Pressure, Status Quo in June Becomes Fed Consensus
It is noteworthy that as the new Fed Chair Warsh is about to take office, Trump’s insistence on lowering rates has moderated.
According to reports, Trump stated in a recent interview that rising inflation linked to Iran-related conflict has complicated the prospects for US rate cuts. Only when tensions in the Middle East stabilize, can inflation data be fully assessed. “You simply cannot really see the data before the war ends,” Trump said, referring to the impact of higher oil prices resulting from the Iran conflict.
Reportedly, Warsh will preside over his first FOMC meeting in mid-June, where he will face an increasingly hawkish stance. This week, Chicago Fed’s Goolsbee said that the US faces excessively high inflation, and controlling inflation should be Warsh’s priority as chair.
Yardeni from Yardeni Research also believes that given the current market environment is “no longer” suitable for easing, the Fed should remove its easing bias at the June meeting. He also expects the Fed to hold rates steady and transition to a tightening stance in June.
Currently, the interest rate futures market sees virtually zero probability of the Federal Reserve adjusting rates in June.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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