Futures traders now put an 82.4% probability on a Federal Reserve rate hike by the Sept. 16 FOMC meeting, up from 52.4% a week earlier. Three overlapping inflation pressures explain the swing: renewed Iran-war energy supply concerns, the next phase of Trumpflation, and AI hardware demand pushing consumer costs higher.
Futures traders repriced the Fed in a single week. The CME Group’s FedWatch Tool, which uses 30-day Fed funds futures prices to track the probability of rate hikes at upcoming Federal Open Market Committee meetings, now shows an 82.4% chance of an FOMC rate hike by the Sept. 16 meeting. That is up from a 52.4% probability of higher interest rates by mid-September as of July 16.
Iran-war energy supply concerns ramp back up
Five months ago, shortly after President Donald Trump green-lit attacks on Iran, Iran closed the Strait of Hormuz to most maritime traffic. That move stymied the transport of a fifth of the world’s liquid petroleum demand, sending fuel prices soaring at the fastest pace in more than three decades.
Progress on U.S.-Iran peace talks in June then drove crude oil prices down to pre-Iran-war levels, easing pain at the pump and lowering trailing 12-month U.S. inflation from 4.2% in May to 3.5% in June. But with fighting between the U.S. and Iran escalating in July, energy prices are climbing rapidly once again.
Core PCE forecast has hardly budged
Trumpflation — inflation driven by Trump’s policies — has entered its next phase, and FOMC policymakers likely know it. Headline inflation declined in June, yet the forecast for Core Personal Consumption Expenditures, which excludes volatile food and energy costs, has hardly budged. That suggests Iran-war-driven inflation has filtered into the broader economy, and indicates it won’t be short-lived.
Higher costs for petroleum-based products such as plastics and synthetic polymers, along with costlier transportation routes, are expenses eventually passed on to consumers.
AI demand is driving above-average inflation
Artificial intelligence, Wall Street’s biggest catalyst, is also fanning the flames of inflation. AI hardware demand outstripping supply has sent graphics processing unit and memory prices through the roof, and the pricing power GPU and memory/storage companies possess is translating into higher costs for consumers.
If the Fed raises interest rates, however, higher rates could slow the AI infrastructure build-out, forcing investors to rethink AI growth rates and the historically unsustainable valuations of AI stocks.
Source: The Motley Fool
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