Financial markets are shifting from expecting Federal Reserve interest rate cuts to pricing in potential hikes as rising energy costs and Middle East geopolitical tensions fuel inflation concerns.

Key points

• CME FedWatch data shows a 30% probability that the federal funds rate will exceed the current 3.50%-3.75% range by year-end.
• Brent Crude oil prices have surged from $70 to $111 per barrel since late February, driving inflation expectations higher.
• The 10-year Treasury yield has climbed to 4.40%, up from below 4% just weeks ago.
• Core inflation remains at 2.5% year-over-year, consistently exceeding the Federal Reserve’s 2% target since April 2021.
• Major assets have faced volatility, with the Nasdaq entering correction territory and gold prices declining 20% since the onset of recent regional conflicts.

Why it matters: The rapid pivot in interest rate expectations signals a significant change in investor sentiment regarding the Federal Reserve's ability to control inflation amid global supply chain disruptions. This shift impacts borrowing costs and asset valuations, forcing market participants to recalibrate portfolios as energy-driven price pressures persist.