The FOMC is almost certain to hold the federal funds rate steady at its June meeting after April CPI came in hotter than expected at 3.8% year-over-year vs 3.7% forecast, up from 3.3% in March. Energy prices drove 40% of the increase, with notable pass-through to core CPI and services inflation rising to 3.3%.
Officials are growing concerned that Iran war energy shocks, combined with tariffs, are broadening into persistent inflation rather than a temporary spike. Fed speakers including Goolsbee, Waller and Hammack have highlighted risks of unanchored expectations after multiple supply shocks.
Incoming Chair Kevin Warsh will inherit a hawkish-leaning committee where dovish assumptions are harder to defend. While a June hike remains unlikely, markets now price nearly 30% odds of a rate increase by December, reflecting a clear shift in risk balance.
Trade analysis
This short-dated contract is dominated by war-driven energy pass-through. The trading edge is assessing whether inflation broadening forces a more hawkish stance or if the Fed continues to sit on its hands.
Bullish (CUT) signals:
- Genuine de-escalation in the Iran conflict
- Weakening employment or growth data
Bullish (HOLD) signals:
- Fed maintaining a data-dependent approach focused on war uncertainties
- Inflation expectations remain anchored
Bearish (HIKE) signals:
- Additional hot inflation prints or clear broadening beyond energy
- Hawkish FOMC statement shift acknowledging possible next move higher
Markets are pricing in a HOLD for June, with very low cut odds and rising hike risk later in 2026. Our base case is for rates to stay unchanged into summer as the Fed monitors inflation developments closely. Traders should position modestly and watch the press conference for bias shifts.