US inflation "burst" changes market expectations! Federal funds rate futures priced in the possibility of a rate hike within the year for the first time.

Against the backdrop of persistently higher-than-expected inflation data in the United States, there has been a significant shift in financial market expectations regarding the policy path of the Federal Reserve. Market participants are now beginning to bet for the first time that the Fed's next move may be a rate hike rather than a rate cut. According to the CME Group's FedWatch tool, following the release of a series of strong inflation data earlier this week, the federal funds rate futures market has begun pricing in the possibility of a rate hike by the Fed as early as December of this year. The data shows that the market is currently placing the probability of a rate hike in December at close to 51%. If we extend the observation period to early 2027, the probability of a rate hike is significantly higher. The probability of a rate hike in January next year is around 60%, and by March 2027, the probability of a rate hike has exceeded 71%. The FedWatch tool calculates market expectations for the Fed's interest rate path based on the prices of 30-day federal funds rate futures contracts. This week, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) in the United States have reached multi-year highs, further fueling concerns in the market about a rekindling of inflation. At the same time, the U.S. import and export price indices have also risen to their highest levels since the previous period of high inflation. Market participants point out that this brings to mind the aggressive rate hike cycle by the Federal Reserve in 2022. Back then, the Fed hiked rates four times in a row by 75 basis points each time to curb the surging inflation. It is worth noting that former Fed Governor Jerome Powell officially took over as Fed chairman this past Friday. Powell has publicly stated multiple times that he believes the Fed could still lower rates even in the current environment. However, there has been evident internal division within the Federal Reserve recently. At the most recent Federal Open Market Committee (FOMC) meeting, three members dissented against the policy statement that indicated it was more likely the Fed's next move would be a rate cut. At the same time, a survey of professional forecasters in the United States shows that economists currently expect the U.S. second-quarter inflation rate to rise to 6%, a significant increase from previous forecasts.