Another Rate Hike Is Expected Before the End of 2026. Here's Why It Might Have a Much Bigger Impact on the Markets This Time

In September, the Federal Reserve raised interest rates for the first time since 2023. It didn't rattle the markets. In fact, many stocks continued to rally afterward, seemingly unshaken by the news.

However, things could go much differently if there's another rate hike around the corner, which many investors and analysts believe will happen, particularly with oil prices remaining high due to the ongoing war in Iran. According to the CME FedWatch Tool from the CME Group, the probability of a rate hike for the Dec. 9 Fed meeting is up to 90% right now. While the probability of a hike for the October meeting remains low at 17%, the market appears to be anticipating another rate hike before the year is over.

This could be incredibly problematic, as it could mean Fed chair Kevin Warsh is aggressively targeting inflation to bring it down to 2%. Unfortunately, with inflation remaining persistent, investors may be concerned about a repeat of 2022, when rising interest rates crushed the market -- the S&P 500 (SNPINDEX:^GSPC) declined by more than 19% that year.

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Inflation has been on the rise

Last week, the latest inflation numbers came out, and the news wasn't great. The annualized inflation rate, based on the Consumer Price Index (CPI), rose to 3.7% for September, up from 3.4% the previous month. Both the good news and the bad news are that the biggest factors were tied to the war in Iran, as fuel oil and gasoline had the largest year-over-year increases at 74% and 34%, respectively.

An end to the war could drastically improve the inflation picture. Unfortunately, it doesn't appear to be coming to an end anytime soon, and instead, things appear to be intensifying, with Iran preparing and bracing for a long war.

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Diversification could be key for investors

If there's another rate hike this year, that could be worrisome confirmation for investors that there will be more adversity to come in the markets, simply because of the potential for even more hikes in 2027 if inflation remains high.

Oil and gas stocks have been soaring due to rising commodity prices, and that's an example of how investors could seek to diversify to potentially hedge against current market conditions. Although oil prices are already high, they could continue to soar if the war in Iran doesn't come to an end. Oil and gas stocks, which are sitting on some already impressive returns, may rise even higher; it may not necessarily be too late to invest in them.

Ultimately, holding a balanced mix of stocks that give investors exposure to multiple areas of the market could be key in keeping their portfolios safe amid all this uncertainty.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.