Views for next Fed rate cut pushed back after hot inflation report
Construction continues on the Marriner S. Eccles Federal Reserve building in Washington, DC, on December 30, 2025.
Brendan Smialowski | AFP | Getty Images
A warmer-than-expected wholesale inflation reading for February has investors considering the possibility that the Federal Reserve won’t cut interest rates at all this year.
After the Bureau of Labor Statistics reported that the producer price index posted its biggest increase in a year, futures markets are eyeing the possibility of any realistic cuts leaving the table at least through December.
Even then, the odds of a rate cut at the final Fed meeting of the year have fallen to about 60 percent as persistently high inflation caused by tariffs, the Iran war and rising utility costs will keep the central bank on hold. The PPI report came just hours before the Federal Open Market Committee announced its final interest rate decision.
Eugenio Aleman, chief economist at Raymond James, said the wholesale inflation reading “will likely reinforce the Fed’s decision later today but tip the risk toward a more hawkish tone in today’s FOMC statement.” “Even if rates remain unchanged and we see a lot of opposition, the message could be ‘higher for longer’, especially as energy inflation is set to re-emerge in the coming months.”
Before the war started on February 28, traders were expecting interest rate cuts in both June and September; There was a possibility of another rate cut in December as the Fed tries to balance its dual mandate of stable prices and low unemployment.
However, according to CME, the probability of an outage dropped to only 18.4 percent in June, 31.5 percent in July, and 43.6 percent in September. FedWatch toolCalculating probabilities using 30-day federal funds futures contracts.
low conviction
The probability of a December discount was at 60.5%; This shows that traders welcome the disruption, albeit with relatively low faith. Historically, the 60% level or above has been associated with Fed moves in both directions.
Futures imply a federal funds rate of 3.43% by the end of 2026, compared to the current level of 3.64%.
Of course, trading in federal funds futures is volatile, and the Fed could be pushed back into an easing stance if the labor market weakens further. Fed Governors Stephen Miran and Christopher Waller are advocating immediate cuts, but the rest of the committee appears inclined to keep interest rates where they are until the economic picture becomes clearer.
Correction: The Iran war started on February 28. In the previous version, the name of the country was stated incorrectly.
