May CPI surged to 4.2% year-over-year, highest since April 2023, up from 3.8%, driven by a 23.5% jump in energy prices and 40.5% rise in gasoline due to Iran disrupting the Strait of Hormuz. While some analysts see a potential peak if the conflict resolves, pass-through risks and sticky services prices keep the Fed cautious. As such, the FOMC under new Chair Kevin Warsh is widely expected to hold the federal funds rate at 3.5%–3.75% at its June meeting.
Trump’s “I love the inflation” comments add political pressure for cuts, but Fed officials see no room for easing amid elevated inflation. Markets have shifted from expecting 2026 cuts to pricing in possible later hikes.
Trade analysis
This short-dated contract reflects heightened inflation from the Iran war under new Fed leadership. The edge is distinguishing transitory war effects from broadening price pressures.
Bullish (CUT) signals:
- Rapid war de-escalation and sharp drop in energy prices
- Weakening jobs or growth data outweighing inflation concerns
Bullish (HOLD) signals:
- Core inflation stabilizing without major broadening beyond energy
- Warsh stressing anchored expectations despite political noise
Bearish (HIKE) signals:
- Further acceleration in core CPI or clear pass-through to services
- Hawkish FOMC statement acknowledging two-sided risks tilting toward hikes
As of now, markets expect a solid HOLD and our base case remains rates to stay unchanged as Warsh’s first meeting prioritizes inflation control.