Fed funds futures markets shifted materially in mid-May 2026 to price in a rate hike, rather than a cut, as the next FOMC action, with December 2026 as the earliest expected timing. The repricing follows an inflation surge that has pushed realized CPI above the Fed's 2% target by a significant margin, eroding the rate-cut narrative that had dominated earlier in the year.
For Armada's traditional repo desk, a hike scenario lifts overnight SOFR and compresses the spread between repo rates and floating collateral income, while simultaneously pressuring fixed-income collateral mark-to-market. Term repo transactions entered at lower SOFR expectations may face adverse repricing. The desk should update SOFR forward assumptions in all term transaction models and review whether any fixed-rate legs in repo structures create unhedged rate exposure.