Rate Hike Odds Soar as Iran Tensions and Inflation Concerns Mount
The Federal Reserve is set to make a crucial decision next week on whether to raise interest rates. According to the CME Group's proprietary FedWatch Tool, which tracks 30-day Fed funds futures prices, there's now a 34.7% chance of an FOMC rate hike on July 29, more than triple the probability just a week ago.
The recent deterioration in peace talks between the U.S. and Iran has led to military escalation, causing crude oil prices to surge. This has sent shockwaves through the market, with inflation concerns becoming increasingly pressing for Fed policymakers. The price stickiness of Core Personal Consumption Expenditures (PCE) indicates that the inflationary effects of the Iran war extend beyond the energy sector.
The artificial intelligence (AI) data center build-out is also contributing to inflation, as persistent hardware supply shortages and pricing power push up prices for consumers. If borrowing costs climb, even a minor slowdown in this expansion could leave the stock market vulnerable to significant downside.