Construction continues at the Mariner S. Eccles Federal Reserve Building on December 30, 2025 in Washington, DC.
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Traders are starting to consider the possibility that the U.S. Federal Reserve won’t cut interest rates at all this year after February’s higher-than-expected overall inflation rate.
After the Bureau of Labor Statistics reported that the producer price index posted its largest increase in a year, futures markets bet on a realistic chance of lower prices through at least December.
Still, the odds of a rate cut at the last Fed meeting of the year have fallen to about 60% as persistently high inflation brought on by tariffs, the Iran war and rising service costs keep the central bank on hold. PPI’s report was released hours before the Federal Open Market Committee announced its latest interest rate decisions.
Eugenio Aleman, chief economist at Raymond James, said the overall inflation data “likely supports a Fed hold decision later today, but today’s FOMC statement tilts the risk towards a more hawkish tone.” “Even if interest rates are left on hold and there are multiple objections, the message could lean towards a ‘long rise’, especially as energy inflation looks set to pick up again in the coming months.”
Before the war began on Feb. 28, traders were looking for rate cuts in June and September, and there was an outside chance of another rate cut in December as the Fed tries to balance its dual mandate of price stability and low unemployment.
But according to CME’s FedWatch tool, which uses 30-day federal funds futures contracts to calculate the probability, the probability of a June rate cut has now fallen to just 18.4%, compared to 31.5% in July and 43.6% in September.
low confidence
The probability of a rate cut in December is 60.5%, indicating that traders are leaning toward a rate cut, although confidence is relatively low. Historically, levels above 60% have been associated with the Fed moving in either direction.
Futures suggest the federal funds rate will be 3.43% by the end of 2026, compared to the current level of 3.64%.
To be sure, trading in federal funds futures is volatile, and further deterioration in the labor market could force the Fed back into an accommodative stance. While Fed Directors Stephen Millan and Christopher Waller have advocated for an immediate rate cut, the rest of the Fed seems more likely to leave interest rates unchanged until the economic situation becomes clearer.
Correction: The Iran war began on February 28th. Previous versions incorrectly listed country names.
