Markets have nearly ruled out any Federal Reserve rate cuts before the end of 2027 and priced in about a 37% chance of a rate increase before year-end 2026 after inflation data came in hotter than expected [1, 2]. The CME Group's FedWatch tracker showed a 37% probability of a hike based on April inflation figures, while the Kalshi prediction market put the probability of a Fed rate hike before 2027 at roughly 35% [1, 2].
The increase in market hawkishness was driven in part by rising inflation expectations linked to surging energy prices following the outbreak of the Iran war in late February 2026, which pushed inflation higher [1]. Mark Zandi, chief economist at Moody's Analytics, said, "At this point, I suspect they just stay on hold. 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" [1].
Incoming Federal Reserve Chair Kevin Warsh, expected to take office later this month, is viewed as a supporter of rate cuts. However, Zandi noted, "I just don't see how he's going to get any kind of support for cutting interest rates in the current environment ... Not only cutting rates will be off the table, but even holding rates where they are is going to be pretty tough" [1].
Market pricing removing nearly all chances of rate cuts before 2028 marks a shift amid persistent inflation pressures that remain a focus for policymakers [1, 2]. The CME Group's data from May 12 reflected the current sentiment well and is likely to influence Fed communications and market positioning in the near term [1].
Kevin Warsh's expected assumption of Fed Chair duties later this month may factor into the trajectory of interest rate policy amid these inflationary challenges [1].
