Wall Street heads into one of the most consequential weeks of the year with the bond market all but certain the Federal Reserve is about to raise interest rates for the first time in more than three years — even after stocks staged a broad rebound to close out the week.
Friday's Consumer Price Index report showed prices climbed 0.4% in August, matching July's pace on an annual basis at 3.4% and coming in hotter than the 3.3% economists had forecast. Core inflation, which strips out food and energy, rose 0.3% for the month — above the 0.2% consensus — even as the annual core rate eased slightly to 2.4% from 2.5%. Gasoline prices, up 3.9% on the month and 27.4% over the past year amid the ongoing disruption to Middle East energy flows, accounted for more than a third of the headline increase.
The reaction in rates markets was immediate. The 10-year Treasury yield jumped 11 basis points to 4.954%, its highest level since October 2023, while the 2-year yield climbed roughly 15 basis points to a more than two-year high. Fed funds futures pushed the implied probability of a quarter-point hike at next week's meeting to around 90%, up from about 70% just a day earlier, according to trading data reported Friday.
The data does not fully capture some of the inflation pressures that have emerged more recently. There is little evidence to suggest inflation is returning to target in the near term.
Alexandra Wilson-Elizondo, Goldman Sachs Asset Management
Stocks defy the bond market
Equities shrugged off the hawkish repricing. The S&P 500 gained 0.9% to close at 7,656.98, the Dow Jones Industrial Average rose 1% to 52,573.29, and the Nasdaq Composite added 1% to 26,333.04, according to Friday's closing tallies. The gains snapped a four-session losing streak for the S&P 500 and came as Brent crude retreated nearly 3% off its recent highs, easing some of the energy-driven angst that had weighed on sentiment through the week.
The split reaction — bond yields spiking on hike odds while equities rallied — reflects a market wagering that the Fed's move, if it comes, will be a one-and-done adjustment rather than the start of a tightening cycle, and that easing oil prices will help contain the inflation pressures that forced the central bank's hand in the first place.
Not everyone reads the data as unambiguously threatening. Adam Crisafulli of Vital Knowledge described the report as "still hot" but said the number was "more than enough to justify" a rate increase this month, framing the move as a targeted response to an energy-driven price shock rather than a sign of broader overheating.
The backdrop remains unusual for a hiking cycle: policymakers are being pushed toward tighter policy not by an overheating economy but by an energy shock tied to the ongoing conflict in the Middle East, which has kept diesel prices elevated nationally and complicated the Fed's usual playbook. That tension was visible in Friday's University of Michigan sentiment survey, which showed consumer expectations for year-ahead inflation climbing to 4.6% from 4% the prior month, even as households' assessment of current conditions held up better than their outlook.
What's next
The Federal Open Market Committee meets Tuesday and Wednesday, with a rate decision due at 2 p.m. ET on September 16 followed by Fed Chair's press conference and an updated dot plot half an hour later. The announcement lands the same morning as August retail sales data, adding another data point investors will parse for signs of how the tariff-and-energy inflation shock is feeding through to consumer spending. Producer price data released earlier in the week already pointed to persistent pipeline pressure on costs.
With Fed officials in their pre-meeting quiet period and unable to comment publicly, traders are left to trade the futures curve rather than the commentary. A hike widely expected but not fully priced in leaves room for volatility in both directions — a larger market reaction is likely if the committee holds steady than if it delivers the quarter-point move markets have now largely concluded is coming.
