Another Rate Hike Is Coming: Why Markets May Not Shrug It Off

The Federal Reserve raised interest rates in September for the first time since 2023, but markets largely shrugged it off. However, the stakes are higher now: according to the CME FedWatch Tool, the probability of another hike at the December 9 meeting has climbed to 90%, while the October meeting odds remain low at 17%. This shift comes as inflation, as measured by the Consumer Price Index, rose to 3.7% annualized in September, up from 3.4% the prior month.

The inflation uptick is largely tied to the ongoing war in Iran, which has sent fuel oil and gasoline prices soaring by 74% and 34% year-over-year, respectively. With no end to the conflict in sight, investors are bracing for the possibility that Fed Chair Kevin Warsh will aggressively target inflation to bring it back to 2%, even at the risk of slowing the economy.

If the Fed follows through with another hike, it could be a worrisome confirmation that more adversity lies ahead, especially if inflation remains elevated into 2027. The memory of 2022, when the S&P 500 fell over 19% as rates rose, is fresh in investors' minds. This time, the impact could be even more pronounced because the inflation is supply-driven from geopolitical conflict, which monetary policy cannot easily fix.

For asset classes, this environment favors commodities and energy stocks, which have already posted impressive returns and could continue to climb if oil prices stay high. Meanwhile, growth stocks, particularly those with high valuations, may face renewed pressure as higher rates discount future earnings more heavily. Bonds could also struggle if rate hikes continue, as yields rise and prices fall. Diversification across sectors and asset classes will be crucial to navigate this uncertainty.