The Federal Reserve kept interest rates unchanged, but there were four dissents, the highest number for an FOMC decision since 1992. The dissents included both dovish and hawkish objections.
Chair Powell said the policy stance is in a good place to hold, citing uncertainty linked to the Middle East. Deutsche Bank’s US economists therefore expect the policy rate to remain unchanged this year.
Fed Divisions And Market Pricing
Market pricing shifted towards a higher-rate outlook as oil prices rose and the Fed appeared more divided. By the close, December futures priced 3bps of hikes, with cuts this year largely removed from pricing.
Futures now show a 55% probability of a Fed hike by next April. Separately, Powell is set to remain a Fed Governor after his term as Chair ends on 15 May.
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We should remember the sharp, hawkish repricing we experienced last year when the Fed held rates but revealed a rare four-way dissent among its members. That situation taught us that even with a steady policy, deep internal divisions can signal significant future volatility. This is particularly relevant now, as the upcoming May FOMC meeting could expose similar fractures over how to handle persistent inflation.
Positioning For A Hawkish Surprise
Currently, markets are pricing in a high probability of at least one rate cut by the September meeting, with CME FedWatch Tool data showing over a 65% chance. However, the latest CPI report for March 2026 showed core inflation remaining stubbornly high at 3.1%, well above the Fed’s 2% target. This gap between dovish market expectations and hard economic data creates a vulnerable position for unprepared traders.
Given this risk, we believe it is prudent to add protection against a hawkish surprise in the coming weeks. This could mean buying put options on Treasury futures or using call options on the VIX to hedge against a spike in volatility. The strategy is to insure our portfolios against the market’s current complacency being challenged, much like what we saw unfold in 2025.
Traders should also be looking closely at options on SOFR futures, particularly for the summer contracts. Implied volatility in this space seems to be underpricing the risk that the Fed will signal a “higher for longer” stance to finally break inflation. A hawkish tone at the next meeting could cause a rapid repricing in these derivatives, rewarding those positioned for continued rate pressure.
