Bond Market Now Pricing 3.7 Fed Rate Hikes Over Next 12 Months as Wall Street Turns Bullish

The bond market has sharply repriced its expectations for Federal Reserve tightening, with futures now implying 3.7 rate hikes over the next 12 months, up from just 1.5 hikes priced roughly a month ago. Markets are widely anticipating a hike at this week's Fed meeting, with the CME FedWatch Tool placing a 90% probability on the federal funds rate rising to the 3.75%-4.00% range following the Wednesday decision.

Despite the aggressive repricing, major Wall Street strategists are growing more constructive on equities. Forecasters at Morgan Stanley, JPMorgan Chase and Goldman Sachs have renewed bullish calls, arguing that stronger economic growth and healthy corporate profits will allow stocks to absorb higher rates. Leverage Shares analyst Violeta Todorova echoed that view, saying any pullback tied to Fed action could be a buying opportunity. Deutsche Bank data also shows that stocks have historically performed reasonably well during Fed weeks, with the notable exception of 2022.

Analysts note that hiking odds and S&P 500 price-to-earnings multiples have moved in a clear inverse relationship, meaning elevated rate expectations are compressing valuations even as earnings hold up. A separate report, citing the Wall Street Journal, revealed that a Fed system used to monitor banks suffered an outage lasting more than 24 hours around August 5, adding an operational footnote to an already eventful period for the central bank.