#FedRateHikeExpectationsResurface

The last time anyone seriously talked about the Fed hiking rates again, most people laughed it off. That was three weeks ago.

The situation has shifted faster than the market expected. The Iran war has done something that inflation data, tariff threats, and political pressure all failed to do — it put a rate hike back on the table with real probability attached to it. As of this week, CME FedWatch odds of at least one hike in 2026 crossed above 50% for the first time. Polymarket had it at 24% just days prior. The move in expectations has been rapid and largely unpriced.

The 2-year Treasury yield is now approaching 4%, a level that tells you markets are no longer treating hikes as a tail risk. The 10-year yield climbed to its highest point since July 2025. Normally, war drives investors into Treasurys as a safe haven. Instead, yields are rising, which means the inflation narrative is winning over the flight-to-safety narrative. That is a significant signal.

Here is what Bank of America laid out as the Fed's three conditions for actually hiking: the labor market needs to stay tight with unemployment below 4%, inflation needs to visibly re-accelerate rather than just stall, and longer-term inflation expectations need to become unanchored. Right now, condition one is borderline, condition two is in motion via energy prices, and condition three is the one to watch most closely.

Powell said this week that a "vast majority" of FOMC members do not have a hike in mind and it is too soon to assess the war's full economic impact. Chicago Fed President Goolsbee was more candid — he can "see circumstances" for a hike if inflation gets out of control, while also leaving the door open for multiple cuts if things calm down. That kind of two-sided language from Fed officials is itself a message.

The base case remains a hold or eventual cut. But the window between "cut" and "hike" has compressed dramatically in a matter of weeks. In a market where positioning was entirely skewed toward easing, that repricing alone is enough to cause real damage to rate-sensitive assets — crypto included. Watch the 2-year yield, watch energy prices, and watch whether inflation expectations start showing up in the University of Michigan survey data. Those three together will tell you more about the Fed's next move than any press conference will.