Wall Street Can't Decide What the Fed Will Do Next. CME Group Gets Paid Either Way.

Will it, or won't it? That's the question most investors are struggling to answer after last week's shocking inflation reports. They were already well up in April, and May's inflation figures hit three-year highs.

The Federal Reserve's usual response would be to raise interest rates to curb price-inflating spending. But raising rates in this challenging economic environment could end up doing more harm than good. Now the rate cuts anticipated to begin later this year have ceded to cautious, defensive bets that they'll actually start inching higher then. Such indecision, of course, works against stocks.

There is one company that benefits from this uncertainty, and all the hedging stemming from it. That's CME Group (NASDAQ: CME), formerly known as the Chicago Mercantile Exchange.

The market is responding

That's not all it is anymore. In 2007, the exchange merged with the Chicago Board of Trade to form parent company CME Group, which went on to acquire the New York Mercantile Exchange. Now the organization operates as a futures middleman for agricultural commodities, metals, interest rates, some market indexes, and more. If it's not a stock, it's probably handled by CME.

This is an important distinction, too.

Just because trading activity in equities might be muted doesn't mean the need to manage other auction-priced assets simply goes away. Plenty of companies, including airlines, food processors, insurers, and even miners, will buy and sell futures contracts as a means of protecting themselves from unpredictable price changes. Speculative traders do it too, although the practice has certainly become less speculative than it used to be. It's a must-do for institutions and even individuals looking to defend their portfolios from the unknown.

This trading, of course, has a cost, and this cost is collected by CME in the form of spreads, transaction fees, and simply selling market data.

This has become a very big deal to CME in the past couple of months, when inflation firmed up dramatically. Interest rate futures contracts -- one of several futures CME handles -- have seen a swell of trading activity.

Take CME's reported activity on highly popular 10-year Treasury notes as an example. Nearly 73 million contracts traded hands last month, up 24% year over year, and nearly 92% higher than April's activity. Two-year note futures activity jumped almost 31% from last May's levels, and soared almost 129% just from the prior month. Five-year note trading volume improved 94% in one month alone, while always-active Fed Funds Rate futures experienced a 61.5% increase in trading volume between April and May.

Image source: Getty Images.

That's just a sampling. It's also just through May, and doesn't yet reflect the surge that's sure to have stemmed from the recently posted inflation figures that are forcing the Fed's hand.

Sooner than later

It's still too soon to say for sure whether this backdrop will prove a boon for CME Group in the fiscal quarter ending this month. For what it's worth, though, analysts' expectations for 2% revenue growth this quarter -- and comparable earnings growth -- seem low in light of the sudden swell of interest rate futures trading activity.

Either way, analysts think it's coming sooner than later. They're modeling top-line growth of nearly 11% for next quarter, with similar earnings growth in the cards.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.