US inflation forecasts rise, fueling Fed rate hike bets and crypto caution

Key facts

• Investors anticipate the Federal Reserve may raise interest rates at its upcoming meeting.
• Higher interest rates could undercut stock performance by raising borrowing costs and competing with equity valuations.
• The S&P 500 is up nearly 12% year-to-date but has recently pulled back about 2% from its mid-August all-time high.
• US Treasury yields have climbed, with the benchmark 10-year yield nearing 5%.
• Fed funds futures suggest an over 80% chance the central bank will raise its rate by a quarter-percentage point.
• The core Personal Consumption Expenditures Price Index came in last month at 3.3% on an annual basis.

Investors are heading into the Federal Reserve's upcoming meeting with heightened expectations of an interest rate increase, driven by recent inflation data and hawkish commentary from Fed officials. The core Consumer Price Index (CPI) rose by a hotter-than-expected 0.3% in August, fueling bets that the central bank will hike rates by a quarter percentage point at the conclusion of its two-day meeting next week. Fed funds futures late on Friday suggested an over 80% chance of such a move.

Higher interest rates could pose a challenge to the current stock market rally, which has seen the S&P 500 gain nearly 12% year-to-date. The index has recently pulled back about 2% from its mid-August all-time high, partly due to rising bond yields. The benchmark 10-year Treasury yield has climbed to multiyear highs, nearing 5%, which could increase competition from bonds and pressure equity valuations. Investors are also contending with geopolitical tensions that have pushed oil prices above $100 a barrel.

Analysts are closely watching the CPI report as a key determinant of the Fed's next move. The core Personal Consumption Expenditures Price Index, a key inflation gauge for Fed officials, registered 3.3% on an annual basis last month. Some investors believe that even if the Fed holds rates steady in September, further hikes could occur later, and a market rally following a pause might be an opportunity to "fade."