Fed Holds Rates Steady as Inflation Risks Re-emerge

The Federal Reserve left interest rates unchanged last night at 3.5%3.75%, in line with expectations. With inflation worries picking up on the back of higher energy prices, policymakers are signaling a "waitandsee" stance. Chair Jerome Powell said the Fed is prepared to move rates either higher or lower as conditions evolve. Even as the Fed characterizes policy as being in neutral territory, market pricing has shifted toward the possibility of a hike later this year rather than a cut. The Wall Street Journal reported that, after hawkish messaging from Fed officials, Wall Street investors have begun placing bets on a 2024 rate increase. CME interest rate futures now imply an 11% probability of a rate hike this year, up from 5% earlier in the day and 0% on April 29. By comparison, the probability of a rate cut is still around 2%, suggesting expectations are moving away from cuts and toward a hold or potential increase. Analysts say upcoming inflation readings and Fed communications will be the key drivers. CME FedWatch shows markets pricing a 98.6% chance of no change at the June meeting, with just a 1.4% chance of a 25 basis point cut. For July, the probability of rates staying unchanged stands at 96.5%, versus 3.4% for a 25 basis point cut. For September, the market implies a 96.1% chance of no change and a 3.8% chance of a 25 basis point cut. *This is not investment advice.