Stronger-than-expected US payrolls, upward revisions to earlier months and firmer crude oil prices have shifted market pricing away from Federal Reserve easing in 2026. Bloomberg WIRP shows a near-certain pause at the June Federal Open Market Committee (FOMC), while the prospect of any 2026 cut has faded as energy costs rose following the US-Iran war.
Market pricing now implies a 40% chance of a rate hike by December 2026. Projections point to an extended policy pause through 2026, with easing resuming in 2027 via two rate cuts scheduled for late 2Q27 and late 4Q27.
Reset Rate Expectations Amid Strong Jobs Data and Persistent Inflation
We believe the solid May jobs report, which added 275,000 positions and pushed unemployment down to 3.8%, has fundamentally reset rate expectations. Combined with persistent inflation concerns as WTI crude oil holds firm around $95 a barrel, the case for any rate cuts this year has evaporated. Our focus has now completely shifted from easing to a prolonged hold.
Federal Reserve officials have responded with increasingly hawkish commentary, reinforcing the “higher for longer” narrative. The market is now pricing this in, with the CME FedWatch Tool showing a near-certainty of a pause at the upcoming June FOMC meeting. More importantly, it indicates a significant 40% probability of a rate hike by December 2026.
Portfolio Strategies and Policy Outlook
For us, this environment suggests traders should brace for increased volatility in interest rate-sensitive assets. The debate is no longer about the timing of cuts but whether the next move is a hike, creating significant uncertainty. We would consider strategies that profit from this, such as buying straddles or strangles on Treasury bond ETFs.
We are repositioning portfolios to reflect a prolonged period of restrictive policy through the end of the year. This involves looking at options that bet on higher yields, such as buying puts on long-duration Treasury futures. A stronger US dollar is also a likely outcome, making long positions in dollar-call options against other major currencies an attractive play.
This situation reminds us of previous cycles where the final leg of inflation proved the most stubborn, forcing the Fed to remain tighter than markets initially priced. We saw a similar dynamic in 2022-2023 when premature bets on a policy pivot were repeatedly punished. Consequently, we are now modeling for an extended policy pause through all of 2026, with the possibility of easing only beginning in mid-2027.
