Views of the next Fed rate cut were pushed back after a tepid inflation report

Hotter-than-expected wholesale inflation in February is weighing on traders the possibility that the Federal Reserve will not cut interest rates this year.

Following the Bureau of Labor Statistics’ report that the producer price index posted its biggest gain in a year, futures markets took any realistic chance of cutting the table until at least December.

Even then, the odds of a cut at the year’s final Fed meeting fell to around 60% as persistently high inflation — brought on by tariffs, the Iran war and rising utility costs — held the central bank back. The PPI report comes just hours before the Federal Open Market Committee releases its latest interest rate decision.

The wholesale inflation reading “reinforces the decision to hold by the Federal Reserve later today but will turn risk toward a more hawkish tone at today’s FOMC,” said Eugenio Aleman, chief economist at Raymond James. “Even though rates remain unchanged and we see multiple divergences, the messaging may lean towards ‘higher’, especially as energy inflation is set to re-enter the picture in the coming months.”

Ahead of the battle that began on February 28, traders were looking for interest rate cuts in both June and September, with another outside possibility in December as the Fed tries to balance its dual mandate of stable prices and low unemployment.

But the odds of a June cut have now fallen to just 18.4%, down from 31.5% in July and 43.6% in September, according to CME’s FedWatch tool, which calculates probabilities using 30-day Fed funds futures contracts.

Less conviction

The odds of a December cut were at 60.5%, indicating that traders are leaning towards a cut, albeit with a low level of conviction. Historically, a level of 60% or higher has been associated with Fed moves in either direction.

Futures point to a fed funds rate of 3.43% by the end of 2026, compared to the current level of 3.64%.

To be sure, trading in fed funds futures is volatile and further weakening of the labor market could push the Fed into an easing stance. Fed governors Stephen Miron and Christopher Waller are advocating an immediate cut, though the rest of the committee is more inclined to hold rates until the economic picture clears.

Correction: The Iran war began on February 28. An earlier version misstated the country name.