Fed seen holding rates at 3.5%-3.75% as May CPI rises to 4.2%, highest since April 2023

The Federal Reserve is expected to keep the federal funds rate unchanged at 3.5%-3.75% at this week’s FOMC meeting as May CPI inflation accelerated to 4.2% year over year, the highest since April 2023 and well above the 2% target. Newly appointed Chair Kevin Warsh is set to hold his first postmeeting press conference, with investors watching for clues on the path for rate cuts. CME FedWatch puts the probability of no change in June at 98.4%, with expectations for cuts later this year cooling sharply. The shift in the macro backdrop has reinforced higher-for-longer rate expectations, weighing on risk assets.