Fed Rate Hikes Increasingly Likely as Inflation Accelerates

Market Reprices Rate Expectations

Traders moved further away from expecting any inflation-surges-14percent-month-over-month-in-aprilfar-above-forecasts-DRd8JVD8">Federal Reserve interest rate cuts and in fact began anticipating a higher probability that the next move would be a hike, with market pricing taking virtually any chance of a cut off the table between now and the end of 2027. Market pricing implied about a 37% probability of a rate increase before the end of the year.

Brokerages Revise Forecasts

Bank of America now expects the Fed to hold rates steady through 2026 as inflation, strong jobs data and rising energy prices reshape rate-cut bets, with BofA expecting the Fed to remain on hold for the rest of this year with two quarter-point cuts in July and September 2027. JPMorgan Global Research expects the Fed to hold rates steady throughout 2026, with the next move actually being a 25-basis-point hike.

Inflation Concerns Cited

Since the Iran war began, energy prices have been soaring, accounting for more than 40% of a gain in the consumer price index that sent the headline inflation level to its highest in nearly three years. "The fact that higher input costs from oil are being readily passed through to consumers should add to the Fed's worries about inflation," according to Morningstar analysis, with the odds of a rate hike in 2026, while still less than 50%, rising.

Policy Challenges Ahead

Incoming Fed Chair Kevin Warsh, who is expected to be confirmed, is walking into a new inflation alarm, with any dovish assumption that artificial intelligence could help push down inflation being a tough argument to sell to the rest of the Fed committee.