By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panel consensus is bearish, with participants agreeing that a September rate hike is improbable and that the Fed is more likely to cut rates later in 2026 if growth slows. They also agree that the 'AI-driven inflation' thesis is weak and that corporate margin compression is a real threat to the S&P 500.
Risk: Over-tightening into a decelerating global environment (Gemini)
Opportunity: Potential productivity gains from AI infrastructure costs (Gemini)
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Although the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) have all notched record-closing highs since early June, trouble is brewing on Wall Street.
In May, trailing 12-month U.S. inflation surged to a three-year high of 4.2%, spurred by the inflationary effects of the Iran war. While the stock market has thus far been able to climb this wall of worry, the probability of the Federal Reserve raising interest rates has risen sharply.
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On June 12, there was just a 26% chance that the Fed would hike the federal funds target rate by the Federal Open Market Committee's (FOMC) Sept. 16 meeting. As of July 12, this probability has risen to 73%, according to the CME Group's FedWatch Tool.
On the surface, this probably doesn't make much sense. West Texas Intermediate crude oil has plummeted from an Iran-war high of nearly $118 per barrel on April 7 to $74 per barrel in the late evening of July 12. With energy commodities driving inflation higher in the first place, the expectation would be for lower crude oil prices to drag down inflation and ease rate-hike concerns.
But thanks to two culprits beyond higher oil prices, the probability of a rate hike has soared over the last month.
While the closure of the Strait of Hormuz by Iran continues to be a choke point for a fifth of the world's petroleum liquids, Trumpflation (inflation driven by President Donald Trump's policies or decisions) has entered a new phase.
The Fed's preferred measure of inflation (Core PCE) moved up to 3.4% in May, the highest level since October 2023.
-- Charlie Bilello (@charliebilello) June 25, 2026
This was the 63rd consecutive reading above the Fed's 2% target level.
"We've missed for 5 years. And we're gonna fix that."-Kevin Warsh last week pic.twitter.com/Wtayfgt8sq
The steady rise observed in Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, suggests the inflationary effects of this conflict are spilling over into the broader economy. Even though crude oil prices are falling and providing partial relief at the fuel pump for consumers, ripple effects in other areas of the economy are getting worse.
For example, the impact of energy supply chain disruptions on businesses is often delayed by a few months. We're likely starting to see the effects of rerouted supply channels, higher transportation and production costs, and higher prices for petroleum-based products in corporate America. Companies that use plastics and synthetic polymers can expect to pay higher prices, which in turn are eventually passed on to consumers.
Additionally, the Fed minutes from the FOMC's June 16-17 meeting point to a new source of inflationary pressure: the artificial intelligence (AI) infrastructure build-out.
On the one hand, the AI revolution has been exceptionally profitable for investors who had the foresight to put their money to work in graphics processing unit (GPU) developers, chip fabricators, and memory/storage solutions providers. However, the overwhelming demand for these products, coupled with persistent supply shortages, has sent GPU and memory/storage prices into the stratosphere.
Higher price points for AI infrastructure impact businesses and consumers. While some policymakers, including Fed Chair Kevin Warsh, expect AI to improve economic output and ultimately lower inflation, this technology is likely years away from being optimized by businesses.
If Wall Street's No. 1 catalyst does prompt the FOMC to raise interest rates, the Fed could quickly put an end to the stock market's historic AI-driven rally.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"The article's 73% September 2026 hike probability is overstated given factual errors on Fed leadership, non-existent Hormuz closure, and misattribution of inflation drivers."
The article claims a jump to 73% probability of a Fed rate hike by the Sept 16, 2026 FOMC meeting, citing Core PCE at 3.4% (highest since Oct 2023) and spillover from an "Iran war" plus AI infrastructure costs. Yet the piece is riddled with errors: Kevin Warsh is not Fed Chair (Jerome Powell still holds the role as of mid-2025), the Strait of Hormuz was never closed in any 2025-2026 conflict, and WTI crude at $74 is not evidence of persistent energy-driven inflation. Markets have already priced in sticky services inflation; the CME FedWatch move likely reflects hotter-than-expected wage and shelter data, not plastics or GPU prices. A September hike remains improbable—dot plot and market pricing point to cuts later in 2026 if growth slows.
If core services inflation (ex-housing) reaccelerates above 4.5% and Powell is replaced by a more hawkish chair in 2026, the Fed could indeed deliver a surprise 25 bp hike, validating the article's directional call despite its factual inaccuracies.
"The market is misinterpreting capital-intensive AI infrastructure spending as a permanent inflationary force rather than a temporary productivity-enhancing investment."
The article conflates transient supply-side shocks with structural monetary policy requirements. While the FedWatch tool shows a 73% hike probability, this market pricing often reflects liquidity hedging rather than a guaranteed policy shift. The 'AI-driven inflation' thesis is particularly weak; capital expenditure on GPUs is deflationary in the medium term as it drives massive productivity gains, not consumer price inflation. The real risk isn't an AI-induced rate hike, but a policy error where the Fed over-tightens into a decelerating global environment. I expect the 'high-rate' narrative to collapse as Q3 earnings reveal that corporate margin compression, not AI infrastructure costs, is the actual threat to the S&P 500.
If supply chain rerouting due to the Strait of Hormuz creates a permanent, structural increase in the cost of goods sold, the Fed may be forced to hike regardless of the deflationary potential of AI.
"The 47-point jump in rate-hike odds is primarily a market repricing of existing data, not evidence of new economic deterioration that justifies the article's alarmism."
The article's core claim — that a 73% rate-hike probability despite falling oil prices signals imminent tightening — rests on two shaky pillars. First, the 'Iran war' framing is vague; I see no evidence of sustained Strait of Hormuz closure or verified supply disruption data. Second, the AI infrastructure cost argument conflates GPU price appreciation (a *valuation* story, not inflation) with consumer-facing inflation. Core PCE at 3.4% is elevated, but the article doesn't distinguish between sticky shelter costs versus transitory supply-chain effects. The CME move from 26% to 73% is real, but that's largely a repricing of *expectations*, not new economic data. The article confuses market pricing with fundamental reality.
If the Fed's own June minutes flagged AI capex as inflationary, and Core PCE has now printed 63 consecutive months above 2%, the market's repricing may be rational, not speculative — and the article's skepticism could be underweighting genuine persistence in inflation.
"The market-implied odds of a September rate hike are overstated; a data-driven pause is more likely than not."
While the FedWatch odds and the Iran-war narrative grab headlines, the Fed’s path hinges on core inflation and the labor market, not geopolitical shocks. With oil retreating from $118 to around $74, headline inflation eases, but core PCE at 3.4% in May remains well above target, and wage dynamics stay a key uncertainty. The AI infrastructure story may lift productivity later, potentially cooling pricing power, rather than driving immediate inflation. A September hike requires a hotter data sequence than currently implied; absent that, a pause or slower tightening path is plausible, suggesting markets should price in a higher chance of no immediate hike rather than a certainty of one.
If inflation unexpectedly reaccelerates or energy shocks flare up again, the odds could swing back quickly, keeping the Fed on a tightening path regardless of today’s narrative.
"AI infrastructure is transmitting wage inflation faster than productivity gains can offset, validating higher-for-longer into 2026."
Claude's dismissal of AI capex as mere valuation ignores second-order wage pressures in data centers and chip fabrication. If core services ex-housing reaccelerates above 4.5% as Grok flags, the 73% hike probability isn't just hedging—it's pricing a 2026 hawkish regime shift. Nobody has linked persistent 63-month PCE overshoot to potential Powell replacement dynamics.
"The federal debt burden renders significant rate hikes politically and economically impossible regardless of PCE prints."
Grok, your focus on a 'hawkish regime shift' ignores the fiscal reality: the Treasury's interest expense on $36T+ debt makes a 2026 hike a political non-starter. Even if PCE stays at 3.4%, the Fed is effectively trapped. Gemini’s point on margin compression is the real tell—if earnings buckle, the Fed pivots to cuts to prevent a credit event. We aren't looking at a rate-hike cycle; we’re looking at a terminal policy failure where the Fed loses control of the yield curve.
"The fiscal constraint is real, but it doesn't resolve the inflation-credibility dilemma the Fed faces in 2026."
Gemini's fiscal trap argument is compelling but incomplete. Yes, $36T debt service constrains hikes, but that's a 2027+ problem. The immediate question is whether the Fed *can* cut into sticky 3.4% core PCE without political blowback. If inflation stays elevated through Q3 2026, the Fed faces a worse trap: cutting into inflation risks credibility loss, *not* cutting risks a bond market revolt. Grok's wage-pressure thesis in data centers is testable—watch Q2 employment cost index for tech services.
"Debt-service costs do not hard-cap 2026 hikes; persistent inflation could still drive policy tightening despite higher debt service."
Gemini’s debt-service constraint as a hard ‘hike non-starter’ feels too binary. In practice, deficits and debt service are financing considerations, not a hard policy cap—the Fed can still tighten if inflation proves persistent and financial conditions allow. The real risk is credibility and the yield curve, not a budget line item. If core services inflation remains sticky, 2026 hikes could survive debt concerns; the view risks a sudden policy pivot if data surprise to the upside.
The panel consensus is bearish, with participants agreeing that a September rate hike is improbable and that the Fed is more likely to cut rates later in 2026 if growth slows. They also agree that the 'AI-driven inflation' thesis is weak and that corporate margin compression is a real threat to the S&P 500.
Potential productivity gains from AI infrastructure costs (Gemini)
Over-tightening into a decelerating global environment (Gemini)