Possibility of interest rate hike, sharp turnaround in just a few weeks

Just a few weeks ago, the market accepted the U.S. Federal Reserve's (Fed) multiple interest rate cuts in 2026 as a fait accompli. However, the current atmosphere has changed 180 degrees. According to the CME FedWatch tool, the probability that the base interest rate will rise from the current 3.50-3.75% by the end of the year is close to 30%. On the other hand, the possibility that interest rates will be lowered plummeted to 2.9%.

Behind this rapid change are concerns about inflation in the energy market. Since tensions in the Middle East escalated in late February, the price of Brent crude oil has soared from around $70 per barrel to the current $111. Accordingly, the yield on US 10-year government bonds also rose from less than 4% to 4.40%.

Why this is important

Even before the rise in oil prices, core inflation in the United States was well above the Federal Reserve's target of 2%. Core inflation in February recorded 2.5% compared to the same period last year, and has never fallen below 2% since April 2021. The 5-year and 10-year expected inflation also exceeded the target at 2.5% and 2.3%, respectively, and the market predicts that upward pressure on prices will continue in the mid to long term.

According to industry analysis, food and energy prices are likely to remain high for the time being. This is because it will take a considerable amount of time for the maritime transportation issues in the Middle East to be resolved. Even if a peace agreement is concluded early, normalization is expected to take several months.

The intersection of the U.S. economy and the asset market

The United States is a net exporter of energy, so rising oil prices have positive aspects for the overall economy. There is an analysis that a sharp decline in gross domestic product (GDP) can be avoided as the economic stimulus effect due to increased military spending is expected.

However, the financial market is showing a different picture. Gold prices fell about 20% after the US military intervention, and the Nasdaq index fell more than 10% from its peak in 2026 and entered a correction phase.

Bitcoin did well in the short term, but long-term performance was poor

Bitcoin has been fluctuating between $65,000 and $70,000, and has been doing relatively well since the outbreak of the Iran war. While gold and Nasdaq plummeted, they remained relatively stable.

However, if you look at a longer time axis, the story is different. As of early March, the price of gold had more than doubled over the past year, and Nasdaq had also risen 50% from its low point in April 2025. On the other hand, Bitcoin is down about 50% from its all-time high in early October 2025. From a mid- to long-term perspective, Bitcoin is still performing poorly compared to stocks and gold.

Future outlook [AI analysis]

As the situation in the Middle East is unlikely to stabilize in the short term, upward pressure on energy prices is likely to continue. This is a factor that increases uncertainty about the Federal Reserve's interest rate policy. If inflation rises again, discussions on additional interest rate increases, rather than interest rate cuts, may begin in earnest.

In the case of Bitcoin, it is expected that there will be a period of intersection between expectations and disappointment regarding its role as a safe asset in the short term. However, from a long-term perspective, since it has undergone a large adjustment compared to the past high point, some analysis suggests that there will be room for a rebound if the macro environment stabilizes. Investors need to keep a close eye on macroeconomic indicators such as oil prices, government bond yields, and Federal Reserve remarks for the time being.