The prediction markets are pricing in a stunning reversal of Federal Reserve expectations following this week's FOMC decision. Fed policymakers voted to leave the benchmark federal funds rate unchanged at its current range of 3.5% to 3.75%, but the market response suggests investors believe much higher rates lie ahead.

The hawkish repricing is unmistakable across multiple timeframes. For the March 2027 meeting, traders now see a 97¢ chance rates will be above 3.50% (up from 30¢) and a 56¢ chance they'll exceed 4.00% (up from 3¢). The April 2027 meeting shows similar aggressive hawkishness, with above-4.25% rates jumping from 11¢ to 50¢.

One factor is the uncertainty associated with the war with Iran that started nearly three weeks ago. The fighting and its impact on the Strait of Hormuz has roiled the global oil market and threatened to keep inflation above the Fed's 2% target. Powell's cautious tone about "uncertain" Middle East impacts appears to have spooked markets that were expecting more dovish guidance.