How quickly do narratives change in financial markets? Earlier this year, investors were expecting the US Federal Reserve to cut rates at least twice in 2026. Now, the conversation has shifted completely — and a rate hike is back on the table.
What Changed?
Inflation made a comeback. After months of relative calm, price pressures have come roaring back — and the data is hard to ignore.
From a high of 9.1% in June 2022, US CPI made is way down to 2.3%, the lowest in recent months, in April 2025. Since then, US inflation has been surging. In April, the Consumer Price Index (CPI) surged to 3.8%, a three-year high. The Producer Price Index (PPI) also saw a significant 6% increase — the largest since 2022. Both numbers have upended the belief that inflation was getting tamed. On the contrary, it appears to be climbing again.
What does this mean for the Fed? To control inflation, the US Fed will have to hike rates and tighten liquidity — at least, that is what the market is now expecting. If inflation continues to climb and remains sticky, a rate hike may not be ruled out.
Why a Rate Hike May Not Hurt
The US Fed has a twin objective: managing inflation and keeping a robust employment market. The good news is that the job market is not showing signs of cracking, and the broader economy is faring well. This gives the Fed more room to hike rates without risking a sharp economic slowdown.
Had the economy been in poor shape, raising rates at this stage would have been a much harder call.
“Rate hikes are back on the table. Policymakers think the labor market is stable, and a vast majority see more inflation risk. They’re also worried about tariffs and embedded price pressures. The committee is getting more hawkish as Kevin Warsh joins,” says David Russell, Global Head of Market Strategy at TradeStation.
Three signals worth watching that call for a rate hike ahead are:
Signal 1 — The FOMC Minutes
The recently released minutes of the FOMC meeting held on April 28–29 revealed what Fed members are thinking. A majority of the Fed’s monetary policy committee indicated that interest rates would need to be raised if inflation remains above the 2% target.
“The Fed minutes reminded markets that inflation remains the main concern — and rate hikes are still on the table if price pressures stay elevated. Investors had grown comfortable expecting eventual cuts, but the latest release reinforced the Fed’s ‘higher for longer’ stance,” says Gina Bolvin, President of Bolvin Wealth Management Group.
Signal 2 — CME FedWatch
The CME FedWatch tool is now showing a high probability of a rate hike in the months ahead — particularly in December. As of May 22, although a rate hike possibility exists across the next few FOMC meetings, there is a more than 50% probability of a rate hike at the December meeting. Specifically, 41% expect a 25 bps rate hike in December 2026, while nearly 17% expect more than 50 bps or more of rate hike.
Signal 3 — Bond Markets
Perhaps the most telling signal is coming from the bond markets. Bond yields have increased to levels last seen on the brink of the Global Financial Crisis, around 19 years ago. The 10-year yield has risen to 4.68%, a 16-month high, while the 30-year yield has surged to 5.2%, the highest level since July 2007.
Why are bond yields rising? Two forces are at play. First, investors increasingly believe the Fed will raise rather than cut rates. Second, governments around the world may face fiscal challenges as investors demand a higher risk premium — and are selling bonds to reflect that view.
But is the rising yield a cause for worry? Read our in-depth piece on ‘Why a 5% rate shock won’t kill this bull market’, here.
A New Fed Chair, a New Challenge
The Powell era as US Fed chair has ended — though he remains on the board. Trump had pushed for aggressive rate cuts throughout Powell’s tenure, which never materialised.
Now, as Kevin Warsh takes over as Fed Chair, the task is no easier. Stubborn inflation restricts his flexibility on rate cuts in the second half of 2026. However, Trump’s latest remarks suggest he is prepared to give Warsh room to make his own decisions — meaning the public spat between the President and the Fed Chair that defined the Powell years is unlikely to continue.
What Is the Stock Market Watching?
Despite all the uncertainty, the US stock market has hit record highs. The S&P 500 and Nasdaq Composite have risen 9% and 13% respectively since the start of the year, while the Dow Jones Industrial Average has exceeded 50,000, up 4.6% year-to-date.
However, rising bond yields pose a significant risk — particularly for technology and growth stocks, where higher capital costs reduce future valuations.
The Bigger Picture — Where Rates Have Been
To understand where rates may go, it helps to remember where they have been. Until January 2022, the US Fed Funds Rate sat at a range of 0–0.25%. From March 2022 to July 2023, rates rose sharply to 5.5% and were held there until July 2024. Since September 2024, the rate cut journey began, settling at 3.50%–3.75% since December 2025, where they remain today. Markets are now pricing in a rate hike in December 2026.
What to Watch From Here
Much can change between now and December. Any rate hike scenario depends heavily on whether inflation remains sticky. US CPI and PPI data over the coming months will be critical. An end to the Iran war could bring oil prices lower, easing inflationary expectations and potentially reversing rate hike bets back to rate cuts. With the December FOMC meeting still at least six months away, several variables could flip the narrative once again — just as quickly as it flipped this time.
Disclaimer: This article is for general informational purposes only and does not constitute investment, financial, or trading advice. Past trends in Federal Reserve policy are not indicative of future decisions. Bond yields, equity market levels, and CME FedWatch probabilities are subject to rapid change. Readers are advised to consult a registered investment advisor or qualified financial professional before making any investment decisions based on the US Federal Reserve policy outlook.
