The Fed Beige Book reported employment “little to no change” across 11 Districts, with one showing modest growth, while prices rose at a “moderate to strong” pace and most Districts saw higher inflation than in the prior report. ISM May surveys broadly aligned: the Prices Paid indices pointed to upside inflation risk, and the Employment gauge held steady below the 50.0 boom/bust threshold. Markets are pricing a 25 bps rise in the Fed funds rate to a 3.75–4.00% target range by year-end, with 75% implied odds, a configuration that has supported a firmer USD.
Dallas Fed President Lorie Logan, an FOMC voter, said she is increasingly concerned that higher rates may be needed later this year to restore price stability. She was one of three regional Fed presidents, alongside Beth Hammack and Neel Kashkari, who opposed adding an easing bias to the 29 April post-meeting statement. Further Fed commentary is due from Richmond’s Tom Barkin (2027 voter), Vice Chair for Supervision Michelle Bowman, San Francisco’s Mary Daly (2027 voter), and Kansas City’s Jeff Schmid (non-voter).
Labor Market Stabilization and Upside Inflation Risk
We are seeing the US labor market stabilize while inflation shows signs of reaccelerating. Last week’s May CPI report came in hot at 3.1% year-over-year, and the latest jobs report showed a solid gain of 195,000 positions. The Fed’s Beige Book and recent ISM surveys corroborate this view of sticky inflation and a resilient economy.
Consequently, the market is now heavily pricing in a 25 basis point Fed funds rate hike by the end of the year, with CME FedWatch probabilities for a September hike now exceeding 80%. This hawkish repricing is creating a strong tailwind for the US Dollar. We expect this trend to continue as long as economic data remains firm.
Trading Implications: Strong Dollar Playbook Remains in Focus
For derivatives traders, this points towards strategies favoring a stronger dollar against currencies with more dovish central banks, such as the Euro or Yen. We believe long dollar call options or call spreads offer a defined-risk way to capitalize on this trend. Consider positioning for higher interest rate volatility through options on Treasury futures, as the market digests the possibility of a “higher for longer” reality.
We’ve seen this playbook before, particularly in late 2023 and early 2024, when markets priced in aggressive rate cuts that failed to materialize due to stubborn inflation. This historical pattern suggests caution is warranted for those positioned for an imminent Fed pivot to easing. The path of least resistance for the dollar appears to be upward in the coming weeks.
