A customer shops for produce at a HEB grocery store on May 11, 2026 in Austin, Texas.
Brandon Bell | Getty Images
Traders on Tuesday moved away from expectations that the Federal Reserve would cut interest rates, and actually began betting that its next move would be more likely to be a rate hike.
CME Group’s FedWatch 30-day federal funds futures trading tracker says market prices have accounted for virtually all possible declines between now and the end of 2027, following better-than-expected inflation reports.
In fact, there are growing expectations that concerns about the cost of living are greater than concerns about the deterioration of the labor market, and the probability of an interest rate hike by the end of this year is more than one-third.
“Right now, policy is likely to remain on hold,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC. “The deciding factor for the Fed is if inflation expectations continue to rise, and if inflation expectations rise further, at that point I think the Fed will probably focus on inflation and start raising rates rather than cutting them.”
Although consumer surveys show rising inflation expectations, market-based measures have had little effect.
But since the Iran war began, derivatives contracts known as “forwards” have been rising, recently hovering around levels last seen in the fall of 2025.
Energy prices have soared since the fighting began in late February, accounting for more than 40% of the rise in the consumer price index that pushed headline inflation levels to the highest level in nearly three years, according to a Bureau of Labor Statistics report on Tuesday.
Market prices around noon Tuesday suggested the probability of a rate hike by the end of the year was about 37%.
Hawkish market expectations are a particular challenge for incoming Fed Chairman Kevin Warsh, who is set to take office later this month. Mr. Warsh has been an outspoken supporter of lower interest rates, and President Donald Trump has similarly been vocal about his hopes for central bank easing.
“I have no idea that there will be any support for a rate cut in the current environment,” Zandi said of Warsh. “If[inflation expectations]continue to rise and trend higher, that’s going to be difficult. Not only will cutting rates be off the table, it’s going to be pretty difficult to even keep rates where they are.”
Indeed, some Wall Street commentators on Tuesday emphasized the importance of the energy shock to CPI data.
Eugenio Aleman, chief economist at Raymond James, said April’s gains were much smaller when excluding food, energy and housing, with the latter rising 0.6%, the biggest monthly increase since September 2023.
Similarly, Jefferies economist Thomas Simmons said there is still little evidence that the spike in energy inflation is spreading throughout the economy. At the very least, Simmons expects the Fed to keep policy on hold while it waits to see how things unfold.
“As time passes, the likelihood of a rate cut at some point this year becomes less likely, but we still expect the next move in policy rates to be a rate cut rather than a rate hike,” Simmons said in a note.
