CME FedWatch tool shows 34.7% odds of four hikes by September 2027

The CME Group's FedWatch Tool assigned a 34.7% probability on October 11 that the Federal Open Market Committee will raise the federal funds target rate by 100 to 175 basis points by the September 2027 meeting. The current target rate stands at 3.75%-4.00%. This projection follows the Federal Reserve's first rate hike under Chair Kevin Warsh, which began a new cycle in September.

The primary driver for this outlook is inflation linked to President Donald Trump's policies, often referred to as Trumpflation. Research published on Liberty Street Economics by economists at the New York Federal Reserve indicates that tariffs contributed 2.9 percentage points to goods price inflation by February 2026. The study notes that without these tariffs, goods prices would have declined slightly. Approximately one-quarter of every point in higher tariff rates appears in consumer prices within a year. A 10% across-the-board tariff results in a 2.6% rise in consumer goods prices after one year, with about two-thirds of that increase coming from pricier imports and the remaining third from U.S.-made goods as producers face higher input costs.

Energy supply disruptions have further compounded inflationary pressures. The source reports that a conflict between the U.S. and Iran led to the Strait of Hormuz closing to most commercial vessels, causing fuel prices to spike. This disruption is described as the largest energy supply interruption in modern history. Fed Chair Kevin Warsh stated that removing a dose of accommodation in September was the correct decision, and both the CME Group's tool and bond markets indicate that additional rate hikes are necessary given entrenched inflation.

The AI-driven bull market has pushed the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to record highs this year. This rally is fueled by massive capital expenditure on data center infrastructure, which has boosted corporate growth rates and elevated stock valuations. However, AI infrastructure purchases are partially financed with debt. If borrowing costs rise by one or more percentage points over the next 11 months, the data center build-out could slow, adversely affecting growth projections.

Market valuations remain historically high, with the Shiller PE ratio nearing its all-time high from the Dot Com Bubble era. When the market is priced for perfection, even marginal slowdowns in growth can have significant impacts. Historically, premium valuations have not been sustainable over extended periods, and an aggressive rate-hiking cycle could serve as a catalyst for a market correction.