Fed funds futures now show an over 80% chance the Federal Reserve raises its benchmark rate at next week's meeting, after hotter-than-expected August inflation data. The move would test a U.S. stock rally already showing some vulnerability to climbing Treasury yields.
Investors head into next week's meeting bracing for that outcome, with Fed funds futures late Friday pointing to an over 80% chance the central bank raises its rate by a quarter percentage point when its two-day meeting ends Wednesday, according to LSEG data. That would lift the rate hike target above the range the Fed has held steady in 2026. The Fed's current rate stands at 3.5%-3.75%.
Inflation Data Tips the Odds
Bets on a hike grew after last month's speech by new Fed Chair Kevin Warsh, which markets widely perceived as hawkish. Odds firmed further on Friday once data showed the core Consumer Price Index, which excludes food and energy, rose 0.3% in August, a hotter reading than expected. The core Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, came in at 3.3% annually last month.
According to Alicia Levine, chief investment officer at BNY Wealth: "The weight is now on a hike in September."
Stocks Navigate Rising Yields
The S&P 500 is up nearly 12% in 2026, lifted by earnings growth tied to AI infrastructure spending. It has since pulled back to about 2% below its mid-August all-time high.
A bond-market selloff has pushed the 10-year Treasury yield to 4.99% early Friday, its highest in nearly three years. It eased to 4.97% late in the session. Rising yields could pressure equities further, and rate-sensitive shares of smaller, debt-reliant companies could struggle more than the broader market.
Fed Independence Faces a Test
Investors said Wednesday's decision will also signal whether a hike is an isolated move or the start of a series, since a signal of more increases ahead would likely weigh on stocks. Some investors framed the meeting as a test of Warsh's inflation-fighting credibility, which came under scrutiny after his press conference at the Fed's July meeting. JP Coviello, head of portfolio strategy at Citi Wealth, said the market remains concerned a bit with respect to Fed independence.
Source: Economy News
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