Markets Price In Possible Fed Rate Hike by September as Inflation Runs Hot

A sharp repricing is underway in rates markets as persistent inflation forces investors to confront a scenario few expected at the start of the year: the Federal Reserve hiking rather than cutting. According to the CME FedWatch Tool, markets now see roughly a 65–70% chance the Fed raises its policy rate by at least 25 basis points by September, with futures pricing implying a cumulative 25-bp hike near 50% and an outside chance (~20%) of 50 bps. The shift is rooted in stubborn inflation data. May headline CPI rose 4.2% year over year, up from April's 3.8% pace, while energy costs — driven higher by geopolitical conflict since late February — have accounted for more than 40% of recent CPI gains. Core PCE, the Fed's preferred gauge, has climbed from 3.0% late last year toward 3.6%, and the FOMC's June projections revised PCE inflation sharply higher to roughly 3.6% for 2026. Housing-driven disinflation has largely run its course, leaving other core services sticky. The Fed, under new Chair Kevin Warsh, held its target range at 3.50%–3.75% at its June 17 meeting — a fourth consecutive hold — while signaling a more hawkish tilt. New dot-plot projections show nine officials now see at least one hike this year and six anticipate two or more. Wall Street has followed: Deutsche Bank projects two additional 25-bp increases, in September and December, and Bank of America has floated as many as three hikes on its 2026 radar. The asset-price reaction has been textbook. On the most recent hot inflation report, 2-year Treasury yields jumped about 16 bps and 10-year yields rose 6 bps, while the S&P 500 fell 1.2% and the small-cap Russell 2000 dropped 0.8%. Rate-sensitive growth and small-cap names remain most exposed, and longer-duration Treasuries face renewed pressure as the prospect of cuts evaporates. Still, the path is not assured. A meaningful chunk of the FOMC — another nine officials — still expects no move or even a cut, reflecting concern that tariff- and energy-driven price spikes are one-off rather than structural. With several CPI and PCE releases due before the September meeting, the September odds are likely to swing meaningfully with each print. For now, the market's message is clear: the easing cycle investors banked on has been replaced by a real risk of tightening, and portfolios are adjusting accordingly.