Uh-Oh! The Probability of an FOMC Rate Hike Within the Next Year Is Soaring.
Key Points
Although the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite recently hit fresh highs, inflationary risks to the U.S. economy and stock market are growing.
U.S. inflation is at a three-year high, driven by a historic energy supply disruption from the Iran war.
A forecasting tool from CME Group strongly suggests interest rate hikes are on the horizon.
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Earlier this month, the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) blasted to record highs. However, the performance of Wall Street's major indexes doesn't always reflect underlying economic uncertainty.
Inflation poses a real risk to the U.S. economy and Wall Street – and it's something new Fed Chair Kevin Warsh may be forced to tackle early in his tenure.
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Kevin Warsh being sworn in as Fed chair. Image source: Official White House Photo by Daniel Torok.
Inflation has hit a three-year high
A modest level of inflation is healthy for businesses and the economy. Since January 2012, the Federal Reserve has adopted a 2% long-term inflation target. But since the start of the Iran war, the U.S. inflation rate has been rapidly climbing.
Not long after President Donald Trump green-lit attacks on Iran, the latter closed the Strait of Hormuz to nearly all commercial vessels. We've borne witness to the largest energy supply disruption in modern times, halting the flow of approximately 20 million barrels of petroleum liquids per day.
US inflation is red hot.
-- The Kobeissi Letter (@KobeissiLetter) May 28, 2026
1. CPI Inflation: 3.8%, highest since May 2023
2. PCE Inflation: 3.8%, highest since May 2023
3. PPI Inflation: 6%, highest since March 2023
4. Services Inflation: 3.4%, highest since Sept 2025
5. Shelter Inflation: 3.3%, highest since Sept 2025
6.... pic.twitter.com/u8kaSN54G3
Prices at the pump jumped almost immediately. However, the delayed inflationary effects on businesses threaten to push inflation even higher. As of this writing on June 7 (i.e., prior to the release of the May inflation report), trailing 12-month (TTM) inflation was projected to rise from a reported 2.4% in February to 4.18% in May -- a three-year high.
Although Wall Street entered 2026 with the expectation that several rate cuts would be enacted, the Federal Open Market Committee (FOMC) may be on the brink of changing course. The FOMC is the 12-person body, including Fed Chair Warsh, responsible for establishing the nation's monetary policy.
Image source: Getty Images.
The probability of a rate hike by June 2027 is rapidly rising
While no forecasting tool can concretely predict the future, the CME Group's FedWatch Tool suggests there's a growing likelihood of the FOMC announcing one or more rate hikes within the next year.
The CME's FedWatch Tool uses live trading data from the 30-day Fed funds futures market to calculate the probability of interest rate changes at upcoming FOMC meetings. Although the probability of an FOMC rate hike was already rising as of mid-May, it has jumped even more, as of this writing. Here's the probability that the federal funds target rate will be higher than the current range of 3.5% to 3.75% at future FOMC meetings:
- July 2026: 8.2% probability of a hike
- September 2026: 24.6%
- October 2026: 34.1%
- December 2026: 50.5%
- January 2027: 58.1%
- March 2027: 68.2%
- April 2027: 72.1%
- June 2027: 72.6%
To put these figures into perspective, the probability of a rate hike between October and January has jumped by six to eight percentage points in roughly three weeks. By late 2026/early 2027, the CME's FedWatch Tool points to higher interest rates.
Rate hikes seem especially likely given that Fed Chair Warsh was a noted monetary hawk during his previous tenure on the FOMC (Feb. 24, 2006 – March 31, 2011). Even as the unemployment rate soared during the financial crisis, Warsh cautioned against lower interest rates, fearing that it might reignite inflation.
Additionally, the April Fed meeting minutes note that a majority of FOMC members favored removing the easing bias statement. It would appear that we're on the verge of a monetary policy shift that's likely to unsettle a pricey stock market.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.
