CME pins Fed hold at 93.5%

Interest rates are back to being an inflation story. That’s the shift. A few weeks ago, markets were still toying with the idea that the Fed could start easing soon. Now traders are treating a June hold as the base case, because two things hit at once — oil surged after the Iran war disrupted Gulf energy flows, and Treasury just told markets it needs more cash. ### Why did Fed-cut bets fade so fast? Because the thing that changed wasn’t abstract. It was energy. CME’s FedWatch tool now shows traders heavily leaning toward no change at the June 17, 2026 FOMC meeting, with only slim odds of a July cut. FedWatch is built from fed funds futures, so it’s basically the market’s running vote on where policy goes next. When those probabilities swing this hard, it usually means investors think the inflation risk changed more than the growth risk did. (cmegroup.com) ### Why does oil matter so much to the Fed? Because oil is one of the fastest ways a geopolitical shock gets into prices people actually pay. Brent crude jumped more than 55% from the start of the war to its peak near $120 a barrel, after attacks and shipping disruptions around the Strait of Hormuz snarled exports across the Gulf. Even if crude pulls back from the(cmegroup.com)ne, freight, airline tickets, chemicals, and eventually food and goods. (cnbc.com) ### Why does Treasury borrowing belong in the same story? Because bond supply affects yields, and yields affect financial conditions. On May 6, Treasury announced a $125 billion quarterly refunding to replace about $83.3 billion of maturing notes and raise roughly $41.7 billion in new cash. The package includes a $58 billion 3-year note, a $42 billion 10-year note, and a(cnbc.com) matters even more when inflation worries are already pushing investors to demand higher yields. (home.treasury.gov) ### Is this really a deficit story too? Yes — not just a one-auction story. CBO’s March outlook put the fiscal 2026 deficit at about $1.9 trillion, and budget watchers now frame a $2 trillion full-year deficit as a live possibility rather than a tail risk. Treasury also said it expects to keep coupon and floating-rate note auction sizes steady for at least the next several qua(home.treasury.gov)needs. That tells you the borrowing pressure isn’t going away. (cbo.gov) ### Why do oil and deficits hit the same market? Because both land on Treasuries, just through different channels. Oil raises inflation fears, which pushes investors to expect a tougher Fed. Bigger deficits raise expected bond supply, which can force yields higher to clear the market. Put those together and long-dated Treasuries get squeezed from both sides. That’s why the 30-year yield pushed above 5(cbo.gov)r-term easing bets faded. (bloomberg.com) ### Does this mean the Fed is done cutting for 2026? Not necessarily. The Fed could still cut later if growth cracks, hiring weakens, or oil retreats hard enough. But the market is no longer pricing a quick rescue. The near-term message is simpler than that — inflation risk re-entered the room, and it did so before the Fed had finished deciding whether the disinflation trend was secure. (cmegroup.com) ### What should investors actually take from this? The market is doing some of the Fed’s work already. Higher oil lifts inflation anxiety. Heavier Treasury issuance lifts yields. Higher yields tighten borrowing conditions for mortgages, companies, and stocks. So even without a rate hike, policy can feel tighter. ### Bottom line This story isn’t just “the Fed may (cmegroup.com)ing each other. That makes early cuts harder to justify — and makes the bond market, not just Powell, the thing to watch next.