Fed funds futures contracts are signaling that the Federal Reserve's next move could be an interest rate increase rather than a cut, a shift driven by a string of inflation data that came in well above expectations.
CME $CME Group's FedWatch tool, which derives its readings from 30-day federal funds futures contract prices, puts the odds of a hike before year-end at roughly 51%, climbing to around 60% for January and exceeding 71% for March, according to CNBC.
This change in market expectations comes after two inflation reports beat forecasts. Consumer prices rose 3.8% over the past year through April, the fastest pace since May 2023, according to the Bureau of Labor Statistics. For the month, prices increased 0.6% after seasonal adjustment. Energy costs led the way, with the energy index up 17.9% and gasoline prices up 28.4% over the year.
Wholesale prices climbed 1.4% in April on a seasonally adjusted basis — the steepest single-month gain since March 2022 — according to the Bureau of Labor Statistics. On an annual basis, the producer price index rose 6.0%, its largest 12-month advance since December 2022. A 7.8% spike in final demand energy led the goods advance, with gasoline prices up 15.6% for the month alone.
The inflation readings arrive as Kevin Warsh takes over as Federal Reserve chair. Warsh, who was confirmed by the Senate 54-45 to succeed Jerome Powell, has indicated he believes the central bank can lower rates in the current environment, though the latest data complicates that case. When the Federal Open Market Committee last convened, the decision to keep benchmark rates unchanged drew dissents from three members who took issue with wording that implied a future cut was on the horizon — the highest number of dissents on a Fed policy statement since the early 1990s.
The Fed has kept borrowing costs steady through 2026, with the benchmark rate at 3.50% to 3.75%. Higher energy costs linked to the war with Iran have fueled much of the recent jump in inflation, sending gas prices to their highest levels since July 2022.
According to CNBC, the Survey of Professional Forecasters has been revised sharply upward, with respondents now projecting that inflation will surpass 6% in the second quarter — a dramatic departure from what forecasters had previously anticipated.