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Markets begin eyeing a Fed rate hike around the turn of the year
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Markets begin eyeing a Fed rate hike around the turn of the year
May 15, 2026 9:03 AM

May 15 (Reuters) - After a run of hotter-than-expected inflation data this week, investors on Friday ramped up bets that the U.S. Federal Reserve will shift into interest-rate hiking mode perhaps before the year is out, presenting a potential policy dilemma out of the starting gate for incoming central bank leader Kevin Warsh.

The probability that the Fed's benchmark interest rate would be 25 basis points higher by January's Federal Open Market Committee meeting was up to around 60% and a hike as early as December was seen as a coin toss, according to CME's FedWatch.

The Fed under outgoing Chair Jerome Powell has held its policy rate in the 3.50% to 3.75% range since December, and despite inflation that has persistently run above its 2% target, it has continued to use language in its policy statement suggesting its next move was likely to be a rate cut.

A growing body of policymakers, however, has begun arguing for a change in stance, and three officials dissented against April's policy statement over the continued inclusion of an easing bias. A readout of that meeting due on Wednesday may indicate how many others were prepared to support a shift to a neutral or even hawkish bias.

Data this week did little to strengthen the case for a rate cut anytime soon. Readings of inflation at the consumer and wholesale levels and of imported goods prices all exceeded economists' already-elevated forecasts, and a report on retail sales showed consumers appear resilient for now in the face of higher prices.

Moreover, the price pressures evident in the data were at their highest since the wave of inflation that emerged following the COVID-19 pandemic and were seen widening beyond energy prices kicked higher by the U.S.-Israeli-led war on Iran.

"The market narrative has shifted from stagflation to reflation due to rising inflation, strong spending and booming earnings," Bank of America analysts wrote.

The abrupt shift in the data and market expectations for the Fed's response looks set to present Warsh with a difficult messaging problem when he takes the reins from Powell, whose term as chair formally expires on Friday.

Warsh was appointed by President Donald Trump, who has been relentless in his demands for lower interest rates and publicly berated Powell for not delivering. Warsh was confirmed by the Senate this week but has not yet had his swearing in scheduled.

He has argued that the adoption of artificial intelligence tools across the economy will lift U.S. productivity and mute inflation pressures, which should warrant lower interest rates. Still, he told senators at his confirmation hearing last month that he had not made any promises to Trump on rates, though he vowed to deliver big changes including increased cooperation with the administration on non-monetary policy matters.

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