Federal Reserve rate expectations have undergone a dramatic recalibration, with traders pricing out the prospect of significant easing through next year. Markets across the Fed funds curve show sharp reversals from dovish to hawkish positioning.

The most striking moves occurred in 2027 expectations, where markets above 3.50% plunged from 97¢ to 49¢, while above 4.00% collapsed from 56¢ to just 4¢. This reflects the median outlook is for an additional cut in 2027 before the funds rate steadies out around 3.1% for the long term, far below previous market expectations.

The Federal Reserve concluded its second meeting of the year by holding the federal funds rate (FFR) steady in the 3.50%-3.75% range, with the March decision influenced by Middle Eastern conflicts. Uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the U.S. economy are uncertain. Market pricing now reflects one cut for 2026 as most likely outcome, a significant downgrade from previous expectations of multiple reductions.