Fed and the Path to 5.5%

The market seems to be pricing in a relatively high probability of a terminal Fed funds rate at or above 5.5% this cycle, particularly after the recent CPI print. I'd put the odds of seeing 5.5% by the September FOMC meeting at around 60%, largely driven by persistent core inflation and the Fed's demonstrated preference for erring on the side of overtightening rather than risking a premature pivot. While some sectors show clear signs of slowing, labor market tightness and sticky services inflation suggest the committee will maintain a hawkish stance for longer than many initially expected. We saw $BRN dip today, which is indicative of some growth concerns, but not enough to materially shift the Fed's near-term calculus on inflation. The probability drops significantly if we get a notable deceleration in core PCE over the next two reports, but that's not my base case right now.