Markets are pricing in a dramatically more hawkish Federal Reserve after recent inflation data and policy signals, with the odds of rates above 1.25% by January 2027 surging from 50¢ to 98¢. The repricing reflects fresh readings showing consumer and wholesale inflation remain sticky, with Fed officials studying the data to chart their 2026 interest rate course. Multiple Fed rate markets moved in lockstep: rates above 3.25% jumped 34 cents to 40¢, while the odds of cuts (above 1.50%) collapsed 43 cents to 54¢.

Recent Fed minutes revealed officials appeared "surprisingly wary" of cutting rates, with several even suggesting the central bank may need to raise rates if inflation remains stubbornly high. The hawkish pivot comes as inflation has been above the Fed's 2% target for over four years and is currently running around 3%. Kansas City Fed President Mester warned against complacency, noting "persistent inflation can shift the psychology around price-setting" and become "ingrained," making re-anchoring at 2% "more difficult and costly".