Fed rate‑cut odds fall below 1% as jobs beat expectations

The CME FedWatch Tool shows the probability of a June 2026 rate cut has collapsed to under 1%, a stark reversal from earlier expectations of multiple cuts this year【1】. The shift follows a surprisingly strong May jobs report that added 172,000 payrolls and kept unemployment at 4.3% for a third month, prompting Goldman Sachs to scrap its 2026 cut forecasts and raise the chance of a hike to 20%【2】.

Market expectations flip

Earlier in 2026, futures traders priced in as many as three quarter‑point cuts, then two, before the odds of any cut fell to single‑digit levels. The latest CME data now indicates that markets expect rates to stay unchanged through the June meeting and to tilt toward a possible hike later in the year【1】. This reflects a broader reassessment that the economy is showing early signs of stagflation—inflation near its 2023 peak while growth slows and labor‑market cracks appear.

Goldman Sachs revises its forecast

Goldman’s chief U.S. economist David Mericle announced on June 6 that the bank no longer expects any cuts in 2026, moving the two‑quarter‑point reductions to June and December 2027 instead【2】. The note also doubled the estimated probability of a modest rate hike from 10% to 20%, though a hike is not yet the base case. Mericle cited the “resilient activity and employment data” as lowering the bar for a hike, not because of overheating risk but because a stronger economy reduces the chance that a hike would be a costly mistake【2】.

Implications for markets

Treasury yields have risen despite softer growth forecasts, as investors demand higher compensation for lingering inflation risk【1】. The bond market’s pricing of higher yields underscores the belief that the Fed may need to tighten policy rather than continue easing. Equity valuations are under pressure, especially for growth stocks, while sectors such as banks could feel strain if the yield curve flattens further.

What to watch

• June 2026 Fed meeting – any shift in language toward a hike would reinforce the new outlook.
• Core PCE inflation – a move toward the 2% target could revive cut expectations.
• Next non‑farm payrolls report – a slowdown in job growth would test the Fed’s tolerance for higher rates.

The plunge in cut odds and Goldman’s revised timeline signal that policymakers may soon face a Volcker‑style dilemma: choosing between tolerating higher inflation or accepting deeper economic weakness. How the Fed navigates this trade‑off will shape market direction for the rest of the year.