Fed Rate Hikes Expected to Accelerate Amid Rising Inflation

The Federal Reserve's rate-hiking cycle is expected to accelerate, with only a 4% chance that interest rates will remain unchanged by January 2027. The odds of a 25-basis-point increase are 24.9%, a 50-basis-point hike is 45.9% likely, and a 75-basis-point rise has a 25.1% probability.

Tariffs imposed by the Trump administration on imported goods have contributed to persistently elevated inflation, which now exceeds the Fed's long-term target of 2%. The Iran war has also had a direct impact on consumer prices, with diesel prices hitting a record high at $6.53 per gallon since the conflict began.

The AI data center build-out is another factor driving inflationary pressures, as enterprise demand for graphics processing units and other hardware components has surged, leading to higher costs for consumers.

A surge in long-duration Treasury bond yields is also urging the FOMC to take action, with yields reaching their highest levels since 2023. The bond market has largely ignored attempts by the US Treasury to intervene, focusing instead on the unsustainability of large ongoing federal deficits and the impact of AI hyperscalers' capital demands.