BIG NUMBER 3.73%

• The expected federal funds rate jumped nearly 70 basis points in one month, from 3.05% to 3.73%, as investors abandoned expectations of three Fed rate cuts this year
• Treasury yields surged with the 2-year note up nearly 50 basis points and the 10-year note up over 40 basis points since late February due to war-fueled inflation concerns
• The Fed's own projections indicate just one rate cut in 2025 (median 3.4%), but markets have priced in even less easing amid fears that conflict with Iran could disrupt Persian Gulf oil supplies

Market Summary: Federal Reserve Rate Cut Expectations Shift Dramatically

Key Development:

Investor expectations for the federal funds rate have surged to 3.73% by end-2026, marking a sharp 70 basis point increase from just one month ago when the market anticipated rates falling to 3.05%. The current Fed target range stands at 3.50% to 3.75%.

Primary Catalyst:

Inflation concerns stemming from the war with Iran have fundamentally altered market sentiment. The conflict threatens oil supplies from the Persian Gulf region, raising fears of persistent inflation that could prevent the Federal Reserve from implementing rate cuts this year. Investors have abandoned earlier expectations of three rate cuts in favor of a "higher for longer" stance.

Market Impact:

• 2-year Treasury note yields: Up nearly 50 basis points since late February
• 10-year Treasury note yields: Up more than 40 basis points
• Global rate pressure intensified following hawkish commentary from central banks in England, Europe, and Japan

Federal Reserve Position:

The Fed's latest dot plot and Summary of Economic Projections (SEP) show a median December 2026 fed funds projection of 3.4%, suggesting only one rate cut. However, market pricing indicates even less confidence in rate reductions, with current expectations exceeding the Fed's own projections.

Bottom Line:

The dramatic reversal in rate cut expectations reflects heightened inflation anxiety driven by geopolitical tensions. Bond markets are repricing risk across the yield curve, with investors now positioning for a prolonged period of elevated interest rates that could impact borrowing costs, equity valuations, and economic growth prospects.