US Stocks Plunge as Fed Hike Probabilities Surge, Yields Spike
Treasury yields hit 4.37% as traders abandon rate cut expectations amid oil shock and persistent inflation
US stocks tumbled on Friday as markets dramatically repriced expectations for Federal Reserve interest rates, with traders now assigning a 10% probability of a rate hike in April after months of anticipating cuts.
The S&P 500 fell 0.91% to 6,546, its lowest level in four months, while the Nasdaq Composite dropped more than 1% as technology shares bore the brunt of rising borrowing costs. The Dow Jones Industrial Average declined 0.4%, closing at its lowest point of 2026 at 46,021.43.
The sharp reversal in market sentiment followed a surge in Treasury yields, with the benchmark 10-year note jumping 11 basis points to 4.37%, its highest level since August 2025. The more rate-sensitive 2-year yield climbed 12 basis points to 3.91%. Yields and prices move inversely.
The swift shift in expectations represents a remarkable turnabout from earlier this year, when markets had priced in multiple rate cuts throughout 2026. Overnight index swaps now assign a roughly 20% probability of a rate hike by October, while CME futures show effectively zero chance of any rate cuts in 2026.
Federal Reserve Governor Christopher Waller revealed Friday that he had been prepared to vote for a rate cut following a February jobs report showing 92,000 payroll losses, but changed his position after the closure of the Strait of Hormuz sent crude prices soaring. Brent crude now trades around $107 per barrel, up 55% from pre-conflict levels.
"A high and persistent oil shock would not have a transitory effect on inflation, thus requiring the Fed to take it seriously," Waller said in explaining his decision to vote with the majority to hold rates steady at 3.50%-3.75%.
The Fed's March meeting projections revised inflation expectations higher, with both headline and core PCE inflation now forecast at 2.7% for 2026, up from December's 2.4% estimate. Federal Reserve Chair Jerome Powell emphasized that any rate cuts remain uncertain and contingent on sustained progress toward the 2% inflation target.
J.P. Morgan's chief US economist Michael Feroli took an even more hawkish stance, predicting no interest rate cuts through 2026 and potentially a rate increase in 2027. The forecast highlights how the oil shock has fundamentally altered the policy landscape.
The rapid repricing of monetary policy expectations has created broad headwinds for equities, particularly interest rate-sensitive sectors such as technology and real estate. Analysts at HSBC noted that markets are increasingly pricing in a recessionary outcome as the combination of higher rates and elevated energy costs threatens to dampen economic growth.
Gold prices suffered their worst week since 1983, down 9.5%, as rising rate hike fears pushed real yields higher and diminished the precious metal's appeal as an inflation hedge. The bond market also faced pressure, with investors demanding higher yields to compensate for the risk that inflation could prove more persistent than previously anticipated.