Markets Price Out Rate Cuts Entirely Following Hot Inflation Print
Following April's hotter-than-expected inflation data, financial markets have eliminated expectations for Federal Reserve rate cuts this year and begun pricing in odds of rate hikes by year-end. The shift reflects mounting concern that the Iran war's energy shock could persist and spread through the broader economy.
Market Expectations Shift Dramatically
Market pricing around noon Tuesday implied about a 37% probability of a rate increase before the end of the year. According to CME FedWatch, markets on Tuesday morning were pricing in a nearly 98% chance that the Fed will hold rates steady at its next meeting in June and through most of 2026.
Energy Shock Driving Inflation Concerns
April's hotter-than-expected inflation reading is likely to put the Fed on watch for higher energy costs creeping into other prices, with energy prices accounting for 40% of the increase while shelter and food also surged, and the fact that higher input costs from oil are being readily passed through to consumers should add to the Fed's worries about inflation.
Incoming Fed Chair Faces Hawkish Environment
The hawkish market expectations pose a particular challenge for incoming Fed Chair Kevin Warsh, who is expected to take the reins later this month, with analysts noting they don't see how he's going to get support for cutting interest rates in the current environment and that if inflation expectations continue to move higher, even holding rates where they are is going to be pretty tough.