The cleanest way to read the repricing is to look at the options data the Fed cited in its March meeting minutes. The modal path, based on options prices, shifted to a profile consistent with no rate change this year, after previously implying one 25-basis-point cut, the minutes said.

The same data also showed a more dispersed distribution of outcomes early next year, skewed toward higher rates. That pushed the implied probability of hikes through that period to about 30%, according to the minutes. In other words, traders are no longer just debating when cuts start. Some are now putting meaningful odds on the next move being up.

Futures pricing has shifted in the same direction, with a cut not fully priced in until December, the Fed said. That is a sharp change from the earlier assumption that easing would arrive sooner.

The basic problem is inflation. In March, Powell said total PCE prices had risen 2.8% over the 12 months through February, while core PCE was up 3.0%, he said at the March press conference. By this week’s meeting, those readings had moved the wrong way. Total PCE rose 3.5% over the 12 months through March, and core PCE climbed to 3.2%, Powell said.

Powell tied part of that jump to the rise in global oil prices linked to conflict in the Middle East, he said this week. He also said the Fed’s best response is to use its tools to guide inflation back to 2% over time. That is not the kind of backdrop that usually invites rate cuts.

Tariffs are part of the story too. In March, Powell said a “big chunk” of core inflation, between half and three-quarters, was due to tariffs, and that those effects can take eight to 11 months, roughly a year, to work through the economy, he said. The Fed did not say tariffs were the whole inflation story, and it would be a stretch to make them the whole explanation now. But they remain part of why disinflation has stalled.

The Fed’s own projections still point to eventual easing. In March, the median participant expected the federal funds rate to end 2026 at 3.4% and 2027 at 3.1%, Powell said. Those forecasts imply cuts over time, even if the pace is slow.

Markets have been moving the other way. Powell has been blunt that policy “is not on a preset course,” and that the committee will decide meeting by meeting, he said in March. That kind of language leaves room for almost anything, which is useful only until traders start filling in the blanks with their own scenario.

The March vote also mattered. Stephen Miran was the lone dissenter, preferring to lower the target range by a quarter point, while everyone else backed holding steady, the FOMC statement said. A 10-to-1 split does not suggest a committee itching to ease.

Leadership adds another layer of uncertainty, though not quite the dramatic handoff some market chatter has suggested. Powell said his term as chair ends May 15, and that if Kevin Warsh is confirmed and sworn in, he will become chair, Powell said this week. Until that confirmation happens, the transition is still a condition, not a fact.

The Fed usually cuts when growth weakens enough to force its hand. That is not what the data are showing. In March, the median participant projected real GDP growth of 2.4% this year and 2.3% next year, both a touch stronger than December’s forecast, Powell said. That is not recession language.

The labor market is also holding up. Unemployment was 4.3% in March and had changed little in recent months, Powell said this week. In March, he added that real wages had been rising in the U.S. for roughly three years, he said. That is enough to keep consumers spending, which is helpful for the economy and awkward for anyone hoping for a dovish pivot.

Powell also said he does not see the tariff effects fully showing up in spending yet, he said this week. The import sector, he noted, is only 10% of the economy, he said. Small slice, big headache.

There is also a longer-run reason investors are hesitant to assume rates will glide lower for long. An IMF working paper published last July found that the link between long-term rates and fiscal variables has changed over time and has strengthened as fiscal positions have deteriorated. The paper does not prove deficits are lifting rates right now, but it does suggest that fiscal strain can matter more than it used to.

That is relevant because Fed policy does not operate in a vacuum. Even if the central bank leaves short-term rates alone, other forces can keep the broader rate backdrop firmer than markets once expected. It is not elegant, but then neither is the bond market.

The next PCE release will be the near-term test. If inflation keeps running hot, the case for cuts gets weaker and the market’s new assumption, that rates may stay higher for longer and even face hike risk in 2027, becomes easier to defend. If inflation cools, the latest repricing may prove too aggressive.

For now, the message from the Fed and the market is the same in one respect: neither side is ready to call the path clear. The Fed is holding, markets are shifting, and the federal funds rate outlook for 2027 is looking less like a straight line down than it did a few weeks ago.