Back in December, Jan Hatzius, chief economist at Goldman Sachs, said the federal funds rate could fall to 3 to 3.25% by year-end, while BlackRock expected a pause at the start of the year and, with a new Fed Chair in place, a shift toward lower rates. Fast forward to the end of May, and the narrative has completely flipped.Markets are now pricing in roughly a 70% chance of at least one rate hike over the next 12 months. Fed officials have also grown more hawkish, with Christopher J. Waller saying one additional hike is expected before year-end as inflation remains elevated, whereas Governor Michael S. Barr warned that rising oil prices could lift inflation expectations, something the Fed will need to watch closely.No wonder yields on both 10-year and 30-year U.S. Treasury bonds have surged in recent weeks. As for the Nasdaq Composite, S&P 500, and Dow Jones indices, their resilience seems largely driven by hopes that the spike in energy prices caused by disruptions in the Strait of Hormuz will fade soon.The only problem is that weeks keep passing, and beyond optimistic headlines in parts of the media and posts on Truth Social, little has changed. Most vessels still cannot pass through the strait freely.Can the U.S. economy handle further monetary tightening?On the surface, U.S. GDP expanded at an annualized rate of 2.0% in the first quarter of 2026, rebounding from just 0.5% in the previous quarter.Beneath it, economists surveyed by Reuters had expected growth of 2.3%, and even if Thursday’s revised figures hold up, AI-related investment appears to have accounted for roughly half of total Q1 GDP growth.Consumer sentiment, meanwhile, fell to 44.8 from a preliminary reading of 48.2 and remains well below the 49.8 level seen at the end of April, apparently on concerns that inflation could spread beyond energy prices and become more entrenched over time.On top of that, higher rates also make borrowing more expensive. According to estimates from the Committee for a Responsible Federal Budget, if 30-year Treasury yields stay around 5.2% and 10-year yields near 4.7%, U.S. debt could grow by another $2 trillion over the next decade, reaching 125% of GDP by 2036. Interest payments alone would rise from 3.2% of GDP, or about $970 billion, in 2025 to 5.3% of GDP, or $2.5 trillion, by 2036.As long as demand for U.S. government debt holds up, this is manageable. But another credit rating downgrade could rattle the debt market. This article was written by IL Contributors at investinglive.com.