The New York Fed’s March Survey of Consumer Expectations showed one-year inflation expectations rising to 3.4%, up 0.4 percentage points from 3.0% in February. This was the largest monthly rise in a year and above the long-run average of 3.34%.
Respondents linked the increase mainly to expected higher petrol and food prices. The survey also noted that conflict in the Middle East was adding to cost-of-living concerns.
Longer Term Inflation Expectations
Longer-term measures changed less than the one-year view. Three-year expectations edged up to 3.1%, while five-year expectations stayed at 3.0%.
The Fed held rates steady in March, and its dot plot pointed to one cut for the rest of 2026. CME FedWatch priced an 89.2% chance of rates staying on hold through June, with more-than-even odds of no cuts for the rest of the year.
JPMorgan forecast no cuts this year and a 25-basis-point rise in Q3 2027. The FOMC minutes are due on Wednesday.
Inflation tracks price rises in a basket of goods and services, reported MoM and YoY. Core inflation excludes food and fuel and is often aimed near 2%.
Market And Trading Implications
CPI measures similar price changes, including Core CPI. Higher inflation often leads to higher rates, which can support a currency and weigh on gold, while lower inflation can do the reverse.
The recent jump in one-year inflation expectations to 3.4% confirms the hawkish stance from the Federal Reserve. This consumer data, which aligns with the latest March Consumer Price Index (CPI) report showing inflation holding at a sticky 3.5%, gives us little reason to bet on rate cuts. We see this as a clear signal to position for interest rates remaining elevated through the summer.
While longer-term inflation expectations are stable, suggesting the Fed won’t panic-hike, the short-term stickiness kills any hope for imminent easing. With the VIX, a measure of expected market volatility, still trading at a relatively subdued level around 15, we think buying options is an attractively priced way to play potential market swings. This setup allows for positioning ahead of this week’s important FOMC minutes release.
We should consider using interest rate derivatives to reflect the low probability of rate cuts this year. Selling futures contracts tied to the Fed Funds Rate is a direct way to bet against the market’s previous, more dovish expectations. Looking back at the aggressive rate hikes of 2022 and 2023, we remember the Fed will prioritize fighting inflation over easing policy prematurely.
This rate environment strongly supports a long US dollar position. With WTI crude oil prices holding firm above $85 a barrel and continued geopolitical tension, the dollar benefits from both higher interest rates and its safe-haven status. We believe using currency futures or options to bet on a stronger dollar against other major currencies is a logical move in the coming weeks.
For equities, sustained high rates present a significant headwind, making bearish positions on stock indices more attractive. Puts on interest-rate-sensitive sectors could offer good risk-reward. Similarly, with the opportunity cost of holding non-yielding assets rising, we see continued pressure on gold prices.
