There's Now an 82% Chance of a Fed Rate Hike by mid-September -- Here's Why

It's been another stellar year for the timeless Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and growth-driven Nasdaq Composite (NASDAQINDEX: ^IXIC), which have hit all-time highs since early June. But the party may be nearing a conclusion, based on the latest interest rate projections.

According to the CME Group's FedWatch Tool, which uses 30-day Fed funds futures prices to track the probability of Federal Reserve rate hikes at upcoming Federal Open Market Committee (FOMC) meetings, there's now an 82.4% chance of an FOMC rate hike by the Sept. 16 meeting. That's up from a 52.4% probability of higher interest rates by mid-September, as of July 16.

This sudden surge in Fed rate-hike probability boils down to three factors.

Image source: Getty Images.

The Iran war energy supply shock isn't over

To begin with, Iran-war-driven energy supply concerns are ramping back up.

Shortly after President Donald Trump green-lit attacks on Iran five months ago, the latter closed the Strait of Hormuz to most maritime traffic. This move stymied the transport of a fifth of the world's liquid petroleum demand, sending fuel prices soaring at the fastest pace in more than three decades.

In June, the U.S. and Iran made headway on peace talks, driving crude oil prices down to pre-Iran-war levels. Although fuel prices are known to rise like a rocket and fall like a feather, the decline in crude oil prices nevertheless eased pain at the pump and lowered trailing 12-month U.S. inflation from 4.2% in May to 3.5% in June.

With fighting between the U.S. and Iran escalating in July, energy prices are once again climbing rapidly.

Just over past week, rate hike probability jumped from 12% to 36% per @CMEGroup #FedWatchTool pic.twitter.com/auq9pnXEnO

-- Liz Ann Sonders (@LizAnnSonders) July 23, 2026

Trumpflation has entered its next phase

Additionally, Trumpflation (inflation driven by Trump's policies) has entered its next phase, and FOMC policymakers likely know it.

While headline inflation declined in June, the forecast for Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, has hardly budged. This suggests that Iran-war-driven inflation has filtered into the broader economy. More importantly, it indicates this inflation won't be short-lived.

Higher costs for petroleum-based products (e.g., plastics and synthetic polymers) and costlier transportation routes are expenses that are eventually passed on to consumers.

Image source: Getty Images.

Artificial intelligence is contributing to inflationary pressures

Furthermore, Wall Street's biggest catalyst, artificial intelligence (AI), is fanning the flames of inflation.

On the one hand, AI hardware demand outstripping supply has sent graphics processing unit (GPU) and memory prices through the roof. Investors in AI infrastructure stocks have made out like bandits.

But there's a literal price to be paid for this success. The otherworldly pricing power that GPU and memory/storage companies possess is translating into higher costs for consumers. In other words, AI demand is driving above-average inflation.

If the Fed raises interest rates, it could slow the AI infrastructure build-out, forcing investors to rethink AI growth rates and the historically unsustainable valuations of AI stocks.

Sean Williams 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.