Futures Markets Flip: Next Fed Move Now a Rate Hike; Q2 CPI Forecast Hits 6%

The implied direction of U.S. monetary policy has reversed. Fed funds futures markets are now pricing in a rate hike as the Federal Reserve's next policy move, with December the earliest window cited by derivatives traders — a sharp pivot from the rate-cut consensus that dominated for most of the past year.

The catalyst is an inflation data shock. The Survey of Professional Forecasters, a blue-ribbon panel polled quarterly by the Federal Reserve Bank of Philadelphia, projected Q2 CPI at 6% — more than double the 2.7% forecast issued three months ago by the same panel. April's CPI print, released the week of May 12, surprised to the upside and re-anchored inflation expectations at multi-year highs.

Bond markets have repriced accordingly. The 30-year Treasury yield has crossed 5.1%, a level last seen during the 2023 tightening cycle peak. The Nasdaq 100 fell 1.5% over the past week as elevated discount rates compressed growth-stock valuations. MarketWatch noted that April's inflation spike "leaves Warsh and the Fed zero excuses not to raise rates."

The political dimension adds complexity. Newly confirmed Fed Chair Kevin Warsh is reportedly navigating internal FOMC friction between rate-cut advocates aligned with President Trump's preferences and hawkish board members citing inflation persistence. Warsh, considered a hawk by Wall Street, is expected to use his early tenure to establish inflation-fighting credibility.

Key risk scenario: A second consecutive upside CPI surprise in May data would push market-implied hike probability above 50%, triggering a simultaneous equity and bond selloff. Conversely, a supply-chain normalization or energy price softening could rapidly reverse futures positioning.

Watch for: June FOMC meeting (date TBD), May CPI release (expected mid-June), and Warsh's first formal public remarks on policy direction.