Analysis-Is the futures market getting ahead of itself on rate hikes?

By Karen Brettell

Tue, May 19, 2026 at 6:04 AM EDT 3 min read

By Karen Brettell

NEW YORK, May 19 (Reuters) - It looks like the bond market is betting a Federal Reserve rate increase could be on the way -- but Fed members and economists mostly don't seem to think so. What's going on?

Fed funds futures - ‌the market's favorite tool for predicting rate moves - put roughly 50% odds on the U.S. central bank raising rates by December, ‌following a bond-market rout that sent the 30-year Treasury yield above 5%, the benchmark 10-year yield to a 15-month high and the two-year yield to the highest since March 2025.

But ​many economists believe the fed-funds market may be overreacting to the surge in oil prices and the increase in headline inflation, at a time when Fed members have refrained from suggesting rate hikes are in the offing soon. Some analysts caution that the market's signals may be less reliable than they appear because there is less trading in contracts that expire months down the road.

"There's really low trading volumes in the contracts for the middle of ‌next year," said Will Compernolle, macro strategist at FHN ⁠Financial. "I consider it a pretty low conviction signal from the market. The market might just be really hedging for the risk that a hike does eventually come."

The contracts show the odds of a rate increase rising through the ⁠first half of next year, reaching around 73% by July.

But volumes vary widely and tend to decline over time. While the May 2026 contract has traded around 646,000 times this month, for example, the January 2027 contract has traded just a third as often and the July contract next year has changed hands ​only ​6,400 times.

INFLATION CONCERNS

Ryan Swift, chief U.S. bond strategist at BCA Research, thinks the market ​is moving faster than the data justifies. "The financial markets ‌move very quickly to incorporate new information faster than the actual data," he said. "Sometimes the market's picking up something right, and economists will eventually follow. But often, it's just overreacting."

The Fed held interest rates steady in a range of 3.50% to 3.75% at its April meeting, with just one dissent in favor of a quarter-point rate cut. Notably, three members of the monetary policy committee objected to language in the statement suggesting the Fed would eventually resume cutting rates.

The Fed's dual mandate of full employment and low inflation puts the central bank in a bind. Inflation remains well ‌above the Fed's 2% target and is moving in the wrong direction, yet there ​has been no serious deterioration in the labor market that would give policymakers cover ​to lower rates.