Traders are now placing a nearly 50% probability on the Federal Reserve hiking interest rates by a quarter point later this month. This surge in expectations, up from less than 40% earlier, follows renewed U.S. strikes on Iran, which led to a significant jump in oil prices.
The anticipation for a rate hike is also fueled by hawkish comments from Federal Reserve Governor Christopher Waller, who suggested that policymakers might need to tighten monetary policy if underlying inflation shows broad price pressures. This makes the upcoming U.S. consumer and producer price data, due this week, particularly critical, as they will be the final inflation prints before the Fed's next meeting.
Bond markets have reacted to these developments, with two-year Treasury yields rising to 4.28% and five-year rates hitting 4.37%, both reaching their highest levels since February 2025. The benchmark 10-year yield also climbed to 4.62%. This heightened market activity underscores the growing conviction that the Fed may need to act sooner to control inflation spurred by rising global energy prices and a resilient U.S. economy.
Fed Chairman Kevin Warsh is scheduled to make his first congressional appearance this week. His testimony, combined with the inflation data, is expected to significantly influence the market's assessment of a potential July rate hike. Despite the increasing odds, many investors' baseline expectation remains that no monetary tightening will occur this year.
The geopolitical situation also plays a role, with Brent crude jumping as much as 9.9% after the U.S. and Iran exchanged strikes, and President Donald Trump announced the reinstatement of a blockade on Iranian ships. This further contributes to the inflationary pressures that the Fed is closely monitoring.
