Fed Hike Now Over 90% Likely as Markets Shift from Rate Cuts

Markets have been preparing for rate cuts in 2026, but recent data has shifted expectations towards a potential hike. The CME Group's FedWatch tool now puts the probability of a 25-basis-point rate hike at 90.7%, with Reuters' September 14 poll finding 85% of economists expect the Federal Reserve to raise its target range.

The shift in expectations is due to stubborn inflation and a resilient labor market. The Bureau of Labor Statistics' August Consumer Price Index showed headline inflation rising 3.4% year over year, while core CPI increased 2.4%. Producer prices were even hotter, with the August PPI rising 5.4% over the prior year.

The rise in oil prices has also contributed to the shift towards a potential hike. Brent crude reached $107.82 and West Texas Intermediate hit $102.82 after renewed attacks on Saudi energy infrastructure. Higher fuel costs can work their way through the economy, making an already stubborn inflation problem harder to extinguish.

The investment implications of this change in expectations are significant. The 10-year Treasury yield recently approached 5%, while the 30-year yield moved above 5.3%. This raises the hurdle rate investors apply to stocks, particularly expensive growth companies whose valuations depend heavily on profits expected years into the future.