The Odds of the Fed Ramping Up Its Rate-Hiking Cycle Are Skyrocketing, and 4 Variables — 2 Directly Tied to President Donald Trump — Are to Blame

It’s been a history-making year for Wall Street. We’ve watched the Dow Jones Industrial Average (^DJI -0.67%), S&P 500 (^GSPC -0.77%), and Nasdaq Composite (^IXIC -0.92%) vault to new highs and witnessed the largest-ever initial public offering. But most importantly, we saw Kevin Warsh become only the 17th head of the central bank on May 22.

On Sept. 16, Fed Chair Warsh and 11 other Federal Open Market Committee (FOMC) voting members kicked off only the fourth rate-hiking cycle of the 21st century. The FOMC raised interest rates 25 basis points to 3.75%-4.00% to combat persistently elevated inflation.

According to the CME Group‘s (CME -0.47%) FedWatch Tool, which tracks the odds of future rate hikes/cuts using the 30-day Fed Funds futures prices, as of Aug. 25, there was 64.4% chance that interest rates would remain unchanged at 3.50%-3.75% or tick up a quarter point to where they are now by the Jan. 27, 2027, FOMC meeting.

As of Sept. 25, the odds of the Federal Reserve’s rate-hiking cycle ramping up have skyrocketed. There’s now only a 4% chance that the federal funds rate doesn’t move higher by Jan. 27. Of the remaining 96% odds, there’s a 24.9% chance for a 25-basis-point increase (4.00%-4.25%), a 45.9% probability of 50 basis points in hikes (4.25%-4.50%), and a 25.1% possibility of 75 basis points in hikes (4.50%-4.75%) by Jan. 27.

Four variables are compelling Fed Chair Warsh and the FOMC to act, one of which could pull the rug out from beneath Wall Street’s roaring bull market.

1. Donald Trump’s tariff and trade policy

Although a modest level of inflation is perfectly normal in a growing economy, President Donald Trump’s tariff and trade policy is among the factors lifting the prevailing inflation rate well above the FOMC’s long-term target of 2%.

In theory, applying duties to imported goods should protect American jobs and make domestic products more price-competitive with those brought in from overseas. But things don’t always work out on paper as intended.

BREAKING: August CPI inflation comes in at 3.4%, in-line with expectations of 3.4%

Core CPI inflation falls to 2.4%, also in-line with expectations of 2.4%.

Month-over-month CPI inflation rose +0.4%, the biggest increase since May 2026.

Treasury yields are rising on the news.

— The Kobeissi Letter (@KobeissiLetter) September 11, 2026

Four New York Federal Reserve economists, writing for Liberty Street Economics (“Do Import Tariffs Protect U.S. Firms?”), examined the impact of Trump’s China tariffs from his first term and found them to be inflationary. More specifically, input tariffs — duties assigned to unfinished goods used to complete the manufacture of a product in the U.S. — raised consumer prices.

In July, the Trump administration reimposed sweeping tariffs, ranging from 10% to 12.5%, on more than 80 countries, suggesting that tariff-driven inflation will continue for the foreseeable future.

2. The Iran war

The Trump-led Iran war has had the most direct impact on consumer prices. Not long after military attacks began against Iran, the latter closed the Strait of Hormuz to nearly all maritime traffic. Approximately one-fifth of the world’s liquid petroleum passes through this channel daily.

US Diesel prices hit another record high today at $6.53/gallon, up 74% since the Iran war began.

The damage from skyrocketing diesel prices won’t stop at the pump.

Higher freight, farming & shipping costs will ripple through the entire economy, raising consumer prices on almost… pic.twitter.com/d4KU1QDeWx

— Charlie Bilello (@charliebilello) September 24, 2026

The subsequent impact on global energy markets has been impossible to miss. Gas prices soared at the fastest pace in three decades, while diesel prices reached a record high last week.

The monthly reported Core Personal Consumption Expenditures (PCE) also indicates that the inflationary effects of the Iran war have hit the broader economy. Core PCE, which excludes volatile food and energy expenses, has hardly budged over the last four months. Price stickiness, caused by businesses paying more to reroute shipments and alter their supply chains, is being passed on to consumers.

With no resolution to the Iran war and the closure of the Strait of Hormuz in sight, Kevin Warsh and his peers are being compelled to act.

3. The AI data center build-out

A third variable responsible for rapidly rising interest-rate forecasts is the artificial intelligence (AI) infrastructure build-out.

On the one hand, the AI data center build-out has been one of the greatest investment opportunities over the last three decades. Empowering software and systems to make autonomous, split-second decisions is a multitrillion-dollar opportunity. Enterprise demand for graphics processing units (GPUs), high-bandwidth memory (HBM), rack servers, and storage solutions is insatiable.

But AI can also be described as Wall Street’s Trojan Horse, at least from an inflationary standpoint.

*KASHKARI: INFLATION DRIVEN BY SUPPLY ISSUES, INCLUDING AI-BUILD

Here we go: AI as source of inflation

— zerohedge (@zerohedge) June 26, 2026

Between strong enterprise demand and ongoing GPU and HBM supply shortages, AI companies have never enjoyed the level of pricing power they have now. While that’s great news for investors, it’s awful for consumers. Higher costs for hardware components have worked their way down the line to everyday Americans.

Furthermore, raising interest rates risks choking off the undisputed No. 1 catalyst that’s propelled the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to new heights. If borrowing costs rise and the AI data center build-out slows, even slightly, the second-priciest stock market in history could tumble.

4. Soaring long-duration Treasury bond yields

Last, but certainly not least, a surge in long-duration Treasury bond yields (10-, 20-, and 30-year yields) is urging the FOMC to get aggressive in the fight against persistently elevated inflation.

After a brief intermission, back to the regularly scheduled programming.

The 10Y Note Yield is back to its highest levels since 2023 and the 30Y Note Yield is up to 5.35%, matching 2007 levels.

Despite numerous intervention attempts by the US Treasury, nothing is working.

It… pic.twitter.com/rQQauWBcmn

— The Kobeissi Letter (@KobeissiLetter) September 23, 2026

As a refresher, bond prices and yields are inversely related. Treasury Secretary Scott Bessent’s plan to double or triple scheduled debt repurchases is, in theory, designed to raise Treasury bond prices and lower long-term yields. However, the bond market has largely ignored Bessent’s debt repurchases and focused on bigger issues, such as:

• Persistently elevated inflation: Bond traders want more compensation (i.e., higher yields) to hold debt that won’t mature for 10, 20, or 30 years as inflation climbs.
• Surging national debt: U.S. total debt vaulted above $40 trillion in mid-August, with higher yields pointing to the unsustainability of large ongoing federal deficits.
• AI hyperscalers fighting for capital: Fed Chair Warsh noted that hyperscalers are fighting for capital to fund their infrastructure build-outs, further lifting long-duration bond yields.

Historically, the bond market has led the stock market, and bond traders are crystal clear in their belief that interest rates should rise.