- US interest futures remain cautious amid the Fed’s cautiousness.
- Cooling inflation and labor data are not enough for the Fed to initiate easing.
- Structural inflationary threats and fiscal concerns continue to worry investors.
US interest futures stay on the edge as the Fed maintains a wait-and-watch policy despite a series of dismal US economic data. The recent US CPI figures showed a cooling inflation for May, missing expectations. Yet, Fed officials need more convincing evidence of a slowdown to initiate a rate cut.
Though the inflation data has brought a slight relief to the markets, the labor market data has complicated the outlook. The NFP figures rose to 139k, slightly beating expectations. However, the previous months saw a downward revision. The unemployment rate has ticked up to 4.2%, while jobless claims have also been rising. It indicates that the labor market is gradually weakening, but not enough to prompt the Fed to make an immediate cut.
Hence, futures traders have recalibrated their expectations. The CME FedWatch Tool is now estimating a 68% probability of a rate cut in September, while the July meeting has only 18% chance of a rate cut. Most market participants anticipate one or two interest rate cuts by the end of 2025, with a likely rate at 3.75%–4.00%.
Interest futures have reacted accordingly. The short-term contracts, including Fed Funds and Eurodollar futures, have priced in a modest easing in the last quarter of 2025. On the other hand, longer-dated futures are dominated by fiscal concerns. The growing deficit and ongoing tariff pressures suggest that inflation could remain high, and yield curves may stay steep. Treasury yields have also experienced volatility amid the Middle East crisis and a renewed surge in crude oil prices, which may trigger stagflation.
Traders are now cautious due to a slower policy shift rather than an aggressive easing cycle priced earlier this year. With the next FOMC meeting on June 18, the market participants will be eyeing the dot plot and Powell’s forward guidance.
The balance of risk is tilted towards a cautious policy with the Fed’s unwillingness to ease earlier due to structural inflationary threats. Interest futures are reflecting a pragmatic stance due to ongoing macro uncertainty, moderate rate cuts, and sensitivity to the data.
