As ongoing Middle East conflicts continue to drive up energy prices, new Federal Reserve Chair Kevin Wash was officially sworn in on May 22. However, instead of the long-awaited rate-cutting cycle, he faces a dramatic shift where expectations for interest rate hikes have moved from a fringe topic to a mainstream discussion.

A fundamental reversal in market sentiment has occurred. Data from CME Group shows traders now assign a probability exceeding 58% that the Fed will raise rates by at least 25 basis points before year-end, with that figure having surged to over 80% at one point. In contrast, before the U.S.-Iran conflict began earlier this year, the market broadly anticipated 2 to 3 rate cuts within the year. Federal funds rate futures have already begun pricing in a potential rate hike path for late 2026 to early 2027.

The core driver of this expectation reversal is persistent inflationary pressure. The U.S. Consumer Price Index (CPI) rose to 3.8% year-over-year in April, hitting a nearly three-year high, while the Producer Price Index (PPI) surged by 6% year-over-year. The minutes from the Fed's April meeting released a strong hawkish signal: most policymakers believed that a modest tightening of policy might be appropriate if inflation persists above the 2% target. The meeting resulted in an 8-4 voting split, marking the largest divergence among policymakers since 1992.

Although Wash was nominated by former President Trump as a candidate expected to seek rate cuts, the dramatically changed macroeconomic environment means he may face a difficult choice between political pressure and the reality of inflation after taking office.