U.S. inflation hit its highest in three years as eyes turn to a new Fed Chair with an unproven record

U.S consumer prices reached their highest in three years last month. While the Middle East war continues, the new CPI has put further pressure on Fed already amidst its major leadership change.

In the last 12 months, the CPI went up by 4.2% through May, the largest jump since 2023. The most affected category is energy, as U.S household budgets have been facing a major squeeze by gasoline and fuel costs amid the ongoing conflict.

Meanwhile, the dollar was down 0.2% to 99.75 against the other 6 big currencies after the inflation data was released. Nonetheless, it stayed near its two month high of 100.214, which it touched on Monday.

Short-term rate traders pulled back slightly from bets on a September hike but still largely expect one by October.

Iran tensions keep markets on edge

President Donald Trump said Wednesday that Iran had taken too long to reach a deal and would “have to pay the price,” while Tehran signaled it was reconsidering diplomatic talks following overnight strikes from both sides.

Despite the flare-up, Dominic Bunning, head of G10 FX strategy at Nomura, said broader market sentiment still leans toward a resolution. “We’re still closer to some kind of deal or agreement than further away,” he said.

Elsewhere, the Japanese yen held steady at 160.34 per dollar, near a level widely seen as a trigger for government intervention.

A Bank of Japan rate hike at its June 16 meeting is nearly fully priced in, but analysts say it may not be enough on its own to lift the yen.

Tony Sycamore, market analyst at IG, said it would take hawkish signals from Governor Kazuo Ueda, pointing to a possible September hike and a third before year-end, to move the needle. Without that, he said, Japan’s Ministry of Finance may need to step in to defend the currency.

A Reuters poll showed the BOJ is expected to raise rates this month and again in the fourth quarter, taking borrowing costs to 1.25% by year-end.

The Canadian dollar gained 0.2% after the Bank of Canada held rates steady, with Governor Tiff Macklem warning the bank would not hesitate to hike if needed. Sterling rose 0.3%. Bitcoin was little changed at $62,069.

A new fed chair walks into the fire

All of this comes just days before the Federal Reserve’s June 16-17 meeting, the first chaired by Kevin Warsh, who replaced Jerome Powell earlier this year.

The Fed has held its target rate at 3.50% to 3.75% across three straight meetings, and futures markets show less than a 10% chance of a cut anywhere in 2026, with rate hike bets creeping back in for the first time since 2023.

Warsh, a former Fed Governor from 2006 to 2011, is known for his hawkish views on inflation and skepticism of quantitative easing. His nomination alone sent gold from a record $5,594 an ounce down to $4,745 in a single January session.

But Morgan Stanley chief economist Seth Carpenter cautioned the leadership change may not mean much in practice, noting that rate decisions are made by committee, not the chair alone.

Cryptopolitan has also reported that Wall Street remains skeptical about whether Warsh’s arrival signals any real shift in Fed policy.

J.P. Morgan forecasts the Fed will hold through all of 2026 before potentially hiking 25 basis points in the third quarter of 2027 if inflation stays stubborn. With May’s CPI print at a three-year high, that outcome looks more likely by the day.

What markets want to hear from Warsh on June 17 is simple: is a cut still on the table this year, or has that door quietly closed?