Markets Price Out 2026 Fed Rate Cuts After Hot CPI, Eye Possible December Hike Ahead of June FOMC

Bond traders have completed a striking U-turn on Federal Reserve policy. After May's Consumer Price Index surged 4.2% year over year—the fastest annual pace in roughly three years—CME FedWatch futures no longer price in any rate cuts for 2026, a sharp reversal from the easing markets penciled in earlier this year. The funds target now looks locked at 3.50%-3.75%, where the Fed has held for three straight meetings. Heading into the June 16-17 FOMC meeting, FedWatch implies roughly a 96%-97% probability of another hold. The more consequential shift is at the long end of the curve: markets now price meaningful odds—around 70% by some measures—of at least one hike by December, with a quarter-point December move tracked near 40%. The driver is supply-side inflation. May headline CPI rose 0.5% on the month, lifted by a renewed surge in energy prices tied to Middle East geopolitical tensions. Core CPI was milder, up 0.2% monthly and 2.9% annually, but the acceleration in headline inflation has hardened the Fed's hawkish bias. FOMC minutes from earlier this year flagged that 'some policy firming would likely become appropriate' if inflation ran persistently above the 2% target—language that now reads as a live risk rather than a hypothetical. For markets, the repricing is broadly bearish. Higher-for-longer rates pressure equity valuations, particularly rate-sensitive growth and technology names, and tech stocks slid on the CPI release. Treasuries have sold off as yields reprice the cut premium out of the curve, weighing on bond proxies. Gold, meanwhile, has drawn safe-haven and inflation-hedge demand even as a firmer rate path caps upside. The key question for next week is whether Chair Powell and the Committee validate the hawkish futures pricing. A hold is near-certain, but the updated Summary of Economic Projections—the 'dot plot'—and Powell's tone will determine whether a December hike becomes the base case. Officials have repeatedly cited energy-driven inflation and geopolitical uncertainty as complicating the outlook. With the easing cycle now off the table for 2026 and the next move increasingly viewed as potentially up rather than down, traders are bracing for a hawkish hold and a data-dependent summer. Any further upside surprise in inflation could cement hike expectations, while a renewed cooling in energy prices would be needed to revive the dovish case markets have just abandoned.