There's a 35% Chance That the Fed Hikes Rates at Least 4 Times by September 2027, Which Can Decimate the AI-Driven Bull Market

As of Oct. 11, the CME FedWatch Tool showed a combined 34.7% probability of the FOMC raising rates by 100–175 basis points by September 2027, with the article citing tariff-driven inflation and energy disruption as drivers. New York Fed research cited in the article attributed 2.9 percentage points of consumer goods price inflation by February 2026 to tariffs. The article warns that higher borrowing costs could slow debt-financed AI data-center investment and pressure an expensive, AI-led bull market; these are risks, not reported market moves.

Analysis

The market risk is not simply “higher rates”: it is a supply shock that could lift inflation while weakening demand, leaving the Fed with less room to cushion a slowdown. That makes several additional hikes a scenario, not a reliable base case. FedWatch probabilities are market pricing and can reverse quickly with softer inflation, weaker employment, or easing energy disruption; the cited tariff pass-through estimate also does not establish how much future inflation the Fed will accommodate.

For AI, the second-order channel is the hurdle rate on incremental projects and the value investors assign to distant cash flows. The most exposed are leveraged data-center and power-infrastructure developers, and suppliers dependent on sustained order growth. Cash-rich hyperscalers may be better positioned to maintain projects, potentially gaining share if financing-constrained competitors defer capacity. A pause in new orders—not just higher borrowing costs—is the key transmission to watch.

Near term, rising yields and energy prices can pressure long-duration equities before any capex change is visible. Over 1–3 months, hyperscaler capex guidance, data-center financing costs, and project deferrals are the useful tests. Over 6–18 months, persistent input inflation could shift spending toward efficiency and utilization of existing capacity rather than new builds. CME Group could see higher rates-market activity if uncertainty persists, but volatility does not guarantee earnings upside; verify volume and revenue mix. The contrarian point: the article treats hikes as the dominant risk, while a growth shock could constrain hikes and still damage AI demand.

Key Decisions for Investors

• Use a defined-risk QQQ put spread as a tactical hedge only if real yields continue higher and major hyperscalers signal capex restraint; avoid an outright short based on FedWatch probabilities alone. Risk is the premium paid; reduce or exit the hedge if yields roll over and capex plans remain intact.
• Within AI infrastructure exposure, favor cash-rich platform operators over financing-sensitive data-center and power-buildout names, subject to confirming balance-sheet leverage, committed project funding, and order backlogs. Falsify the relative thesis if constrained developers continue to secure funding and deliver without margin or schedule deterioration.
• Watch CME Group as a potential volatility-volume beneficiary, not a directional rates trade. Verify rate-futures volume and revenue contribution before adding exposure; lower realized uncertainty or falling volumes would undermine the thesis.
• Reassess after the next inflation and employment releases and the next hyperscaler earnings cycle. A sustained energy-price reversal, softer core inflation, or stable capex guidance weakens the rate-shock/AI slowdown thesis.