Wow! The Probability of an Interest Rate Hike in 2026 Has Soared Over the Past Week.

The CME FedWatch Tool now prices a 71% probability of a Federal Reserve rate hike by December 2026, jumping from below 50% just days ago. The catalyst: U.S. inflation accelerated to 4.2% in May, the highest reading in three years.

The shift in rate expectations follows the appointment of Kevin Warsh as Fed Chair. Warsh brings a historically hawkish record on monetary policy, increasing the likelihood that the central bank will tighten rather than ease if inflation remains elevated. The May CPI print marks a clear reversal from the disinflationary trend markets had priced in earlier this year.

Higher terminal rates would pressure equity valuations, particularly in growth sectors trading at elevated multiples. Corporate spending on AI infrastructure—a key driver of recent tech rallies—could face headwinds as borrowing costs rise and capital allocation tightens. The CME FedWatch Tool reflects live market pricing derived from Fed funds futures, making the probability shift a direct measure of trader sentiment rather than a forecast.