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Posted June 5, 2026 at 10:30 am
Rate futures moved to a 68.4% chance of tightening in December, even as June is still priced for a 3.50%-3.75% hold.
A stronger-than-expected May US jobs report pushed traders to price in another Federal Reserve rate hike later this year, even though June is still seen as a hold.
The headline was simple: the US labor market isn’t cooling as fast as many forecasters expected. Employers added 172,000 jobs in May, compared with an 85,000 estimate from economists polled by Reuters. Futures still point to the Fed holding rates at 3.50%-3.75% at its meeting later this month, but the “higher for longer” story got a fresh dose of credibility, so markets assigned a higher chance of an additional move by December. That matters because markets don’t wait for the Fed to actually change rates. Prices in rate futures and “overnight” benchmarks help set borrowing and hedging costs across the economy, so even a shift in expectations can tighten financial conditions. Analysts told Reuters that inflation dynamics outside the Fed’s direct control, like energy prices, could keep policymakers cautious about declaring victory even if growth slows.
For markets: FedWatch’s 68.4% December-hike probability can move yields before the Fed does.
CME Group’s FedWatch tool showed traders moving to a 68.4% chance of a December hike, up from 52% late Thursday, while still pricing June as a pause. When that expected path shifts up, the biggest reaction usually shows up in short-dated interest rates like 2-year Treasuries and 1- to 2-year SOFR swaps (contracts tied to the Secured Overnight Financing Rate, a key US lending benchmark). Higher short-term yields raise the discount rate investors use to value future profits, which tends to pressure “long-duration” parts of the stock market, such as some high-growth tech, more than companies whose cash flows are nearer term. It can also lift real-world funding costs for businesses and households as lenders reprice loans off those same benchmarks.
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