Fed Rate Hike Chances Surge to 82.4% Amid Escalating Tensions

The probability of a Federal Reserve rate hike by mid-September has surged to 82.4%, up from 52.4% just one week ago.

This increase is attributed to three key factors: escalating military action between the U.S. and Iran, which has reignited energy price inflation; Trumpflation entering its next phase, with core personal consumption expenditures (PCE) forecast remaining steady; and artificial intelligence driving above-average inflation through GPU and memory prices.

The CME Group's FedWatch Tool shows that the recent surge in rate hike probability is largely driven by energy supply concerns. After the U.S. and Iran made headway on peace talks in June, crude oil prices dropped to pre-Iran-war levels. However, with fighting escalating in July, energy prices are once again climbing rapidly.

AI hardware demand has led to higher costs for consumers, as companies possess pricing power that is translating into above-average inflation. If the Fed raises interest rates, it could slow the AI infrastructure build-out and force investors to rethink AI growth rates and valuations.