The president Donald Trump spent months aggressively pushing the Chairman of the Federal Reserve Jerome Powell reduce interest. But 21 days into the war in Iran — suddenly — the bond market is starting to scream what Trump never expected to hear.
Rate rise.
Short-term interest rate futures are now pricing in the probability of a Federal Reserve rate hike before the end of the year. Less than three weeks ago, markets had 60 points of cuts on the table.
The Iran war didn’t just change that mindset – it flipped it.
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On Thursday, the 2-year Treasury yield rose 12 basis points to 3.92%, marking its sharpest one-day increase since April 2025.
The move caps a strong price. On a monthly basis, 2-year yields rose 54 basis points — the biggest increase since February 2023, when the Fed was deep into its strongest tightening cycle in four decades.
As a key proxy for near-term interest rate expectations, the 2-year yield is now reflecting market price swings – where investors are increasingly risking another rate hike.
If rate hikes become fundamental, rate-sensitive shares – such as Company Invesco QQQ Trust – they often come under great pressure, as happened during the 2022 tightening cycle.
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The Polymarket’s 2026 Fed rate hike market has reached a 24% probability. Before the war started, the probability of a rate hike was as low as 6%.
The CME FedWatch tool now shows a 40% chance of at least one rate hike in October. And the short-term average futures have effectively paid for all the easing for the rest of the year.
The pricing speed is impressive as is the direction. In early March, the Federal Reserve was expected to cut rates two to three times in 2026.
That consensus was shattered in less than three weeks by one variable: the price of crude oil.
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Bank of America economist Aditya Bhave published a note on Thursday outlining three conditions the Federal Reserve would need to meet before putting rate cuts on the table.
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Labor Market Stability: In 2022, the Fed hiked the recession because the unemployment rate was below 4% and falling. Low wage growth, continued unemployment claims, and a steady job opening rate would support the case.
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Core Inflation Breakout above 3.2%: A 10% increase in WTI adds 7 basis points to the biggest increase in inflation over time. If the Iran panic extends to ships, natural gas, fertilizers, and aluminum – a 2021-22 style supply disruption – 3.2% is achievable.
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Powell Still Working: The Fed’s nominee Kevin Warsh not yet confirmed. Bank of America views Powell as a moderate dove who will steer the labor market if risks are moderate – but he is more hawkish than incoming nominee Warsh, whose recent comments have underscored the urgency to cut. June is the earliest meeting in which the hike could begin, and only if Powell is still chairman.
His conclusion: it will take a lot, but the conditions are unattainable.
The April 10 CPI report is now the most followed data release in years. If it prints at 3.4% or higher, the discussion shifts to when the Fed can hike.
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This article Trump’s war on Iran is doing what no one expected: bringing escalation to the table appeared on Benzinga.com
