Investing.com -- The probability of a Federal Reserve rate increase has risen sharply, with overnight index swaps data showing a 10% chance of a hike by April and 20% by October, marking a significant shift in market expectations.

Mizuho TMT analyst Daniel O’Regan stated, "The most important macro development over the past 24 hours, in my view, has been the sharp shift in rate cut expectations: the market is now pricing a 10% chance of a rate hike in April, up from 6% yesterday and 0% on Wednesday. There is a 0% chance of a cut according to CME futures—quite a reversal from the start of the year when 2–3 cuts were priced."

The shift follows a steep climb in the U.S. two-year Treasury yield, which has risen 50 basis points in less than three weeks, according to DoubleLine Capital’s Jeffrey Gundlach. "The 2 year U.S. Treasury yield has risen 50 basis points in less than three weeks. It now suggests one Fed HIKE may be coming," Gundlach wrote on X.

Higher energy prices resulting from the conflict with Iran have driven up interest rates and fueled investor concerns about inflation. PPI numbers this week were also elevated relative to consensus, even without higher crude reflecting in the data yet.

Fed Chair Powell addressed the inflation concerns at a news conference in Washington on Wednesday. "Near-term measures of inflation expectations have risen in recent weeks, likely reflecting the substantial rise in oil prices caused by the supply disruptions in the Middle East," Powell said.

"Higher energy prices will push up overall inflation," he added, "but it is too soon to know the scope and duration of the potential effects on the economy."