BNP Paribas Warns Fed Rate Hike Is Possible as CME Odds Jump From 10% to 50% in Two Days

The CME FedWatch probability of a Fed rate hike in 2026 jumped from 10% to 50% in two days. BNP Paribas warned that hikes are possible only "in a world of bad choices" — but the 30-year Treasury yield has already crossed 5%, and the bond market is not waiting for clarity.

At the start of 2026, the debate was about when the Fed would cut rates. As of May 15, the bond market is asking a different question entirely: could the Fed raise rates? A confluence of hot inflation data, energy price shocks from the Iran war, and a weak U.S.-China summit rattled fixed income markets and sent Treasury yields sharply higher.

CME FedWatch: Rate Hike Odds Jump From 10% to 50% in Two Days

The CME Group FedWatch Tool showed the probability of a 25-basis-point rate hike this year reaching 50% on May 15. Two days earlier the odds were at 10%. In a single day they jumped to 40%, and then to 50% the following session. A bond market that was positioned for easing flipped its posture in 48 hours.

Long-dated Treasury yields reflected the shift. The 30-year Treasury yield crossed above 5%. The benchmark 10-year yield hit 4.5% on May 15 for the first time since June 2025. The 2-year yield rose above 4% for the first time in 11 months.

BNP Paribas: Hikes Only "In a World of Bad Choices"

We think the FOMC will entertain hikes only in a world of bad choices: either to allow inflation to increase further and become further entrenched into the economy, or to accept the risk that a policy adjustment could prove macroeconomically destabilizing.

James Egelhof, Chief U.S. Economist, and Guneet Dhingra, Head of U.S. Rates Strategy, BNP Paribas

BNP Paribas's base case remains a prolonged hold rather than hikes. But the bank acknowledged that if incoming Fed Chair Kevin Warsh begins raising rates, this "would create downside risk to our otherwise optimistic economic outlook." Warsh, appointed by the Trump administration and known for hawkish leanings, would represent a significant shift in Fed leadership posture.

Inflation Re-Accelerating: PCE Headline at 3.5%

The immediate catalyst for the bond market repricing was a string of hot inflation prints. The BEA's March PCE release on April 30 showed a sharp jump driven largely by energy costs:

• Headline PCE (year over year): 3.5% — up from 2.8% in February
• Core PCE (excluding food and energy, year over year): 3.2% — up from 2.9% in February

The Fed's preferred inflation gauge is now 150 basis points above its 2% target on a headline basis. Economists broadly expect the April PCE reading, due May 28, to remain elevated — reinforcing the higher-for-longer narrative rather than providing any relief.

Iran War and China Tensions Are Fueling Energy Inflation

The Iran war, which began in late February, has introduced persistent energy supply uncertainty. Oil price spikes have driven the headline PCE acceleration, and the timeline for any resolution remains unclear. A weak U.S.-China summit simultaneously dashed hopes for near-term trade tension relief, keeping supply-chain inflation pressures alive.

Investment Implications

A market that is now pricing 50% odds of a rate hike changes the fundamental assumptions underlying most 2026 portfolio construction. Long-duration bonds face continued headwinds. Short-duration instruments and cash improve in relative terms. Growth and technology equities face dual pressure from rising discount rates and compressed multiples. Dollar strength adds a currency headwind for investors in EM assets and Korean equities. BNP Paribas still sees the hold as the base case, but so long as the market is pricing a coin-flip on hikes, volatility is likely to persist across all asset classes.