Inflation flips Wall Street Fed rate bets as PCE data surprises
May PCE inflation data came in hotter than expected, with headline at 4.1% and core at 3.4%, shifting market expectations from rate cuts to potential rate hikes by the Fed.
May's Personal Consumption Expenditures (PCE) price index came in hotter than expected, with headline inflation rising to 4.1% year-over-year and core PCE hitting 3.4%. The data marks a sharp reversal from earlier this year when markets were pricing in multiple rate cuts for 2026. Instead, the stubbornly high inflation figures have flipped the narrative on Wall Street: economists are now debating not when the Fed will cut rates, but how soon it might hike them again.
For interest rate traders, the implications are significant. The Fed's preferred inflation gauge, core PCE, remains well above the 2% target, driven by rising service costs and solid wage growth. Minneapolis Fed President Neel Kashkari, a voting member, has recently emphasized that the central bank needs to see convincing evidence of cooling inflation before considering any policy easing. The shift in expectations has pushed the 2-year Treasury yield higher, reflecting a repricing of the rate path. NowPrice's real-time rates page shows the 2-year yield near 4.85%, with the 10-year at 4.45%, as markets adjust to a higher-for-longer scenario.
Looking ahead, the focus will be on upcoming labor market data, particularly the June nonfarm payrolls report, for further clues on wage pressures. If employment remains strong, the case for a rate hike could gain traction. The next Fed meeting in July will be closely watched for any shift in the dot plot or forward guidance. Traders should monitor NowPrice for real-time updates on Treasury yields and Fed funds futures as the rate debate evolves.