Traders See Next Fed Move as Hike as Inflation Surges
Market traders are now pricing in a potential interest rate increase as soon as December 2026, with growing certainty into early 2027, as a week of surprisingly hot inflation readings has upended expectations. The shift marks a major reversal from March when rate cuts were anticipated, driven by energy-fueled price pressures from the Iran conflict.
Market Repricing Inflation Risk
December hike odds hit 51%, while a January move carries about 60% probability and March comes in at better than 71%, according to CME FedWatch data. This represents a dramatic shift in market sentiment.
The Inflation Shock
The consumer price index rose by 3.8% annually in April, the most since May 2023, exceeding expectations of 3.7%. More alarmingly, core inflation — excluding food and energy — ticked up to 2.8% from 2.6% previously.
Kevin Warsh's Challenge
New Fed Chair Kevin Warsh takes over as of Friday and has indicated he thinks the central bank actually can lower rates in the current environment. However, this dovish stance faces fierce headwinds from market data and three dissenting Fed members at the last meeting who objected to language hinting the next move would be a cut.
Economic Forecasters Signal Worse Ahead
The recent surge in inflation is likely to get worse over the next several months, with consumer price inflation projected to hit 6% for the first quarter according to the Survey of Professional Forecasters, compared with 2.7% in the prior survey.