Traders now see next Fed interest rate move as a hike following inflation surge

For the first time in the current cycle, markets think the Federal Reserve’s next move will be to raise interest rates.

After a week of surprisingly high inflation readings, traders in the Fed funds futures market are pricing in a rise as soon as December, with a much higher certainty for early 2027, according to a report from CME Group. FedWatch tool.

A move higher in December carries a nearly 51% probability, while a move higher by January carries a nearly 60% probability and March comes in at a better price at 71%, according to the measure, which uses prices on 30-day federal funds futures contracts to gauge the odds.

The move comes close to the end of a week in which both consumer and wholesale inflation reached their highest levels in recent years. Import and export prices were also at levels not seen since the last inflation spike, which led to the Fed’s aggressive rate hikes starting with four consecutive moves of three-quarter percentage point increases in 2022.

Former Fed Governor Kevin Warsh took over as head of the Fed starting Friday and said he thinks the central bank can actually lower interest rates in the current environment. At the last Federal Open Market Committee meeting, three members opposed a vote to keep benchmark interest rates steady, objecting to language suggesting a rate cut would be the next move.

Economists surveyed in the Survey of Professional Forecasters think second-quarter inflation will reach 6%, a big increase from the last estimate, according to a statement released Friday.