The probability of the Fed raising rates by the end of 2026 has exceeded 80%. This is not pricing for a marginal scenario — it is the baseline scenario.
Just yesterday, May 20, the 30-year U.S. Treasury yield surged to 5.20%, the highest since July 2007 — the highest in 19 years!
On the same day, the interest rate swap market pushed the probability of at least one Fed rate hike before year-end above 80%.
Both markets are saying the same thing: inflation is not temporary, and the Fed will not sit still forever.
Compared with economist forecasts, this pricing is more aggressive. The latest Reuters survey of 103 economists found that about 54% believe the Fed will hold rates steady through at least the end of Q3 — economists as a group are still watching and waiting, but traders are already betting with real money.
The difference lies not in analytical methods, but in interests: economists make predictions without bearing losses; interest rate swap participants have leverage, risk controls, and stop-losses — these constraints make their pricing behavior closer to their real views.
What does 80% probability mean?
It means that if rates are not raised by year-end, there must have been unexpected data or events that interrupted the existing trend. The market's current logic is: rate hikes are the normal script, and no hikes are the surprise.
Morgan Stanley Wealth Management's Jim Lacamp put it bluntly: "At the beginning of the year, everyone expected rates to fall — that was part of the bullish thesis. Now, it looks like rate hikes are coming."
If the 30-year yield hits 5.25% in the coming weeks, stocks will see a "more sustained pullback." Assuming significant yield volatility in the bond market over the next 12 months, 62% of respondents believe the 30-year yield is more likely to break through 6% than fall below 4% — which would be the highest level since 1999.
Why Can't Inflation Be Brought Down?
Three structural forces are at play — energy transition has driven up electricity costs and industrial product prices, supply chain restructuring has increased transportation and logistics costs, and an aging workforce has weakened supply-side elasticity.
These are not demand-side overheating problems, so rate hikes can suppress demand but cannot change the supply-side structure. This is the most unsettling aspect of the current macro environment.
For the crypto market, the high interest rate environment puts pressure on all assets priced based on future cash flows!
Bitcoin has no cash flow — its valuation rests on three pillars: scarcity, institutional allocation, and safe-haven demand.
When interest rates rise, the institutional allocation thesis gets suppressed — the risk-free rate is rising, so the opportunity cost of holding crypto is rising.
On the positive side, after the deleveraging in October 2025, Bitcoin spot ETFs have recovered about two-thirds of their outflows; but Ethereum spot ETFs have only recovered about one-third.
CME institutional exposure shows the same divergence: Bitcoin has largely recovered, while Ethereum remains well below its previous levels.
This shows that Wall Street institutions are treating Bitcoin as a new institutional allocation layer; Ethereum, on the other hand, behaves more like a tech stock — with validator rewards, staking yields, and network activity. These characteristics become a disadvantage in a high interest rate environment, because tech stocks get sold off first.
The divergence between Bitcoin and Ethereum is not a short-term style rotation — it is institutions redefining the properties of these two asset classes — one is digital gold, the other is a tech stock. In the current interest rate environment, this definition has a substantive impact on fund flows.
The 80% rate hike probability is a constant in the short term, unless new data changes this outlook. This means the crypto market will struggle to make exponential gains in the short term — the forces of valuation compression are still at work.
But one variable could change this judgment: U.S.-Iran tensions. If the conflict truly escalates, oil prices surge, and inflation expectations get out of control, 80% could become 90% or higher — and that would not be good news for the crypto market!
Another noteworthy signal comes from Japan. On May 19, Japan's Financial Services Agency officially announced revisions to the stablecoin regulatory framework. According to multiple crypto media reports, starting June 1, qualified foreign trust-type stablecoins (including USDC) will be recognized as "electronic payment instruments," with the Cabinet Office Order taking effect on that date.
This is not a symbolic move. It means stablecoins are gaining a formal position in the global payment system, and against the backdrop of high interest rates raising cross-border payment friction costs, blockchain-based stablecoin settlement provides a lower-cost alternative. The long-term significance of this news may far exceed its current market reaction.
Conclusion
The 80% pricing in the interest rate swap market is the result of every macro data point, every Fed speech, and every round of geopolitical escalation over the past five to six months.
Against this backdrop, individual bullish or bearish factors struggle to shift direction unless the magnitude is significant enough to force a complete reassessment of the macro trajectory. This explains why the crypto market is currently fluctuating within a range rather than moving decisively — bulls and bears are both waiting, and that waiting itself is a form of pricing.
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