The Fed held rates steady at 3.5%-3.75% last week, but prediction markets are now betting on a dramatically different trajectory. Rising oil prices from the Iran conflict have pushed expected inflation to 2.7% this year, causing traders to abandon rate cut bets. Markets pricing Fed rates above 2.50% in April 2027 surged from 18¢ to 73¢, while bets on deeper cuts collapsed. The contrast is stark: rates above 0.75% plunged from 82¢ to 29¢, reflecting fears that "near term measures of inflation expectations have risen...likely reflecting the substantial rise in oil prices." This hawkish pivot shows markets now expect the Fed to keep policy restrictive far longer than previously anticipated.

Powell's term ends in May, with Trump's nominee Kevin Warsh favoring lower rates, adding uncertainty to an already complex policy environment. The broad-based movement across multiple Fed rate markets signals genuine conviction that inflation pressures will force a more aggressive stance than the single cut officials still project.