Traders drastically repriced Fed policy expectations, with inflation remaining closer to 3% than the Fed's 2% target fueling hawkish sentiment. Markets now price rates above 3.75% at 85¢, a stunning 77-point surge from 8¢. The coordinated moves across the entire rate complex tell a coherent story: the neutral rate may be closer to 3% to 3.25% than previously thought.

The dramatic repricing comes as inflation remains too hot, with recent data suggesting inflation remains closer to 3 percent despite Fed cuts throughout 2025. History has shown that persistent inflation can shift psychology around price-setting, and inflation can become ingrained. With the Fed in a cautious stance and Jerome Powell's term expiring on May 15, 2026, markets are pricing for a less accommodative monetary policy regime ahead.