Probability of Fed Rate Increase Surges to 70% Following Inflation and Oil Price Surge

Key Takeaways

Table of Contents

Traders now assign a 70% probability to a Federal Reserve rate increase at the September 16 policy meeting
The producer price index for August increased 0.4%, driving annual wholesale inflation to 5.4%
Crude oil prices in the United States surpassed $100 per barrel, intensifying inflationary concerns
The yield on 10-year Treasury notes surged to 4.92%, marking the highest level since the financial crisis
This Friday’s consumer inflation data could further shift expectations in either direction

A combination of accelerating wholesale inflation and crude oil breaking above the $100 mark has elevated the probability of a Federal Reserve rate hike at next week’s meeting to 70%, while markets simultaneously anticipate the possibility of an additional increase later this year.

Rising Producer Costs and Energy Prices Fuel Rate Hike Expectations

According to CME Group’s FedWatch tool, financial markets are currently pricing in a 69.8% likelihood of a 25-basis-point rate increase at the Federal Open Market Committee gathering on September 16, representing a jump from Wednesday’s 61.2% probability.

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🇺🇸FED is now projected to hike interest rates in 6 days

Odds have just jumped to 69.8% after the PPI inflation data release

This is not good for markets… pic.twitter.com/ss99dETqeB

— ᴛʀᴀᴄᴇʀ (@DeFiTracer) September 10, 2026

This recalibration followed the release of August’s producer price index, which showed a 0.4% monthly increase. Combined with July’s upwardly revised 0.1% advance, the year-over-year PPI rate reached 5.4%.

Simultaneously, U.S. crude oil prices surged 4% to narrowly exceed $100 per barrel. Elevated energy costs typically ripple through the broader economy, amplifying inflationary pressures and strengthening the case for Federal Reserve intervention.

The European Central Bank made its own move Thursday, implementing a quarter-point rate increase while raising its inflation projections. The ECB identified the continuing Iran conflict as a potential threat to long-term price stability.

Jeffrey Roach, who serves as chief economist at LPL Financial, indicated that inflationary forces are becoming deeply embedded in the economy. Given present circumstances, he characterized a September rate increase as probable.

David Russell, global head of market strategy at TradeStation, highlighted the dual pressures of climbing oil prices and persistently low unemployment claims. He suggested the Fed would find it difficult to justify inaction at next week’s gathering.

Bond Yields Climb as Investors Reassess Federal Reserve Trajectory

Following the PPI release, the benchmark 10-year Treasury yield advanced 7 basis points to reach 4.92%. This represents its most elevated level since the financial crisis era.

Market participants also increased the probability of a second December rate hike to approximately 60%. This adjustment suggests growing apprehension that inflation will not decline rapidly enough to permit an extended Federal Reserve pause.

Stephen Juneau, a senior economist at Bank of America, noted that core personal consumption expenditures are currently tracking at a 0.26% monthly pace for August. When rounded, that translates to 0.3%, which he believes would be sufficient justification for a rate increase.

Bank of America maintains one of the most aggressive forecasts among major financial institutions, projecting three rate hikes across upcoming policy meetings.

Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, cautioned that even a subdued consumer price index reading on Friday would not necessarily indicate that inflation is contained. He emphasized that upstream cost pressures evident in PPI data present a contrasting narrative.

Friday will bring the August consumer price index release. The Dow Jones consensus forecast anticipates a headline annual rate of 3.4% alongside a core measurement of 2.4%.

Fed Chairman Kevin Warsh has previously stated that the personal consumption expenditures price index serves as the Federal Reserve’s primary inflation indicator. Core PCE registered at 3.3% in July.

The CPI report scheduled for Friday represents the last significant economic data release before policymakers render their decision.

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