Fed Funds Rate Pricing by Year-End 2026
May 5, 2026
The futures curve prices zero net rate cuts through December 2026. ZQ (30-day fed funds futures) implies the Fed holds rates at 3.50-3.75% across all five remaining 2026 FOMC meetings, finishing the year at 3.74% 1, a net +11.2bp rise from the current 3.625% midpoint despite the meeting sequence spanning eight months.
Key takeaways
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No cuts priced, modest tightening expected. The cumulative move of +11.2bp across the full 2026 calendar implies the Fed either holds steady or makes marginal upward adjustments in response to inflation persistence. The June meeting carries a 90.8% hold probability, September a 95.7% hold, and December a 71.1% hold, showing conviction that rates remain "restrictive enough" 1.
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Short-end of the curve already embeds the hold. The 1-month, 3-month, and 6-month Treasury yields stand at 3.71%, 3.70%, and 3.76% respectively, all pricing a near-zero probability of near-term rate reductions 2. This tight clustering (3 basis points between 1M and 6M) signals confidence in stable policy through mid-year.
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Long-end steepens modestly, consistent with stable Fed. The 10Y-2Y spread is 50bp 2, and the 10Y yield of 4.45% sits well above the year-end fed funds target of 3.74%, pricing in a modest term premium and inflation compensation rather than easing-driven duration demand 2.
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December meeting shows the most easing optionality. Even the final meeting of 2026 carries only a 71.1% hold probability, implying markets see a ~29% combined probability of a 25bp cut or higher rate environment by December 1. This reflects downside inflation risk or recession fears as tail scenarios, not the base case.
Signal table
| Signal | Value | Horizon | Note |
|---|---|---|---|
| Current Fed Funds effective rate (EFFR) 1 | 3.64% | Spot (May 1) | Steady last 30 days |
| SOFR (collateralized overnight) 1 | 3.64% | Spot (May 1) | Aligned with EFFR |
| Jun 16-17 FOMC implied rate 1 | 3.65% | +2.3bp | P(hold) = 90.8% |
| Jul 28-29 FOMC implied rate 1 | 3.61% | -1.0bp cumulative | P(hold) = 86.8% |
| Sep 15-16 FOMC implied rate 1 | 3.63% | +0.1bp cumulative | P(hold) = 95.7% |
| Oct 27-28 FOMC implied rate 1 | 3.67% | +4.0bp cumulative | P(hold) = 84.3% |
| Dec 15-16 FOMC implied rate 1 | 3.74% | +11.2bp cumulative | P(hold) = 71.1% |
| 1Y Treasury yield 2 | 3.78% | Spot (May 4) | Pins rates above 2026 expected level |
| 10Y Treasury yield 2 | 4.45% | Spot (May 4) | Term premium priced in |
Cross-check
The futures curve and Treasury term structure align: short-dated Treasuries (1M to 6M) cluster tightly around 3.70-3.76%, perfectly consistent with ZQ pricing a hold through mid-year 12. The 10Y at 4.45% is 71bp above the December fed funds target, a spread that reflects historical norms for a "terminal rate" environment where the market expects the Fed to keep policy steady and let term premium absorb inflation expectations.
Caveats
ZQ futures liquidity diminishes beyond September (scores drop to 0.7 for Oct and Dec meetings), so the December implied rate carries wider uncertainty around market microstructure than the June snapshot. The 25bp-step model underlying the probabilities assumes the Fed moves in quarter-point increments; any decision to cut or hike by 50bp would represent a shock not captured in the current probability distribution.
References
Model-derived probabilities anchored to current data; not investment advice. Past base rates and current market-implied probabilities do not guarantee future outcomes.