Another Rate Hike Is Expected Before the End of 2026. Here's Why It Might Have a Much Bigger Impact on the Markets This Time

CME FedWatch puts the odds of another Federal Reserve rate hike by December 2026 at 90%, a probability that signals traders are pricing in tightening rather than the easing many had assumed.

The driver is inflation, which the source attributes primarily to fuel and gasoline prices tied to the Iran war. Fed Chair Kevin Warsh is pushing aggressively to bring inflation back to the Fed's 2% target, which sets up a policy stance focused on price stability over growth support.

The 2022 tightening cycle is the reference point. That year, rate hikes coincided with a decline of more than 19% in the S&P 500. Interpretation: a 90% hike probability suggests the market has largely absorbed the move, but the 2022 precedent shows equities can still reprice sharply when the Fed commits to fighting inflation. Whether this cycle hits as hard depends on how aggressively Warsh follows through.

The source suggests diversification and points to oil and gas stocks as a potential hedge, since the same energy price pressure fueling inflation is what is pushing the Fed toward a hike. That framing treats energy exposure as a counterweight to rate-sensitive holdings.