Traders moved further away Tuesday from expecting any Federal Reserve interest rate cuts and in fact began anticipating a higher probability that the next move would be a hike.
Following a hotter-than-expected inflation report, market pricing took virtually any chance of a cut off the table between now and the end of 2027, according to the CME Group’s FedWatch tracker of 30-day fed funds futures contracts.
Instead, they priced in a better than 1-in-3 chance of an increase by the end of this year, as expectations rose that cost of living concerns would outweigh any worries about the labor market deteriorating.
“At this point, I suspect they just stay on hold,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC. “The deciding factor for the Fed will be inflation expectations, if they do continue to move higher ... If they break out any further, I think at that point the Fed will likely focus on inflation and start raising interest rates as opposed to cutting them.”
While consumer surveys have indicated elevated inflation expectations, market-based measures had been mostly benign.
