For most of 2026, the Federal Reserve's next move was a question with a single answer: lower.

The dot plot pointed lower, the futures curve pointed lower, and the consensus survey of every major Wall Street strategist pointed lower.

On Friday morning, the question changed. A Fed rate hike is now more likely than not by December 2026.

For the near-vertical AI rally that has carried Wall Street to record highs over the past six weeks, this is the moment reality reasserts itself.

The CME FedWatch tool — which aggregates probabilities derived from Fed funds futures and translates them into the implied likelihood of each policy band at every upcoming FOMC meeting — now shows a 56% chance of a hike by the end of the year.

The curve does not stop there. By March 2027, the hike probability sits at 96.71% — effectively certain.

Polymarket's "Fed rate hike in 2026?" contract now trades at 34% — that's roughly triple the 10% to 12% range it inhabited through most of April.

Future Interest Rate Probabilities As Of May 15, 2026

Drop the Easing Bias, Go Straight to a Tightening Bias

In a note shared with clients on Friday, Ed Yardeni, president at Yardeni Research, flagged that two important psychological levels in the U.S. Treasury market are being tested at the same time.

The 2-year yield closed at 4.052%, up 0.92% on the day and 25 basis points above the current funds rate.

The 30-year yield breached 5.00% on May 13 after a $25 billion auction drew the weakest demand for a 5%-handle long bond since 2007.

The 10-year sits at 4.51%.

"Fed officials need to show the bond market that the latest inflation problem requires a more hawkish stance from them for now," Yardeni said.

The data underneath that view did the work on Thursday. April retail sales rose 0.5% month-over-month, the third consecutive solid increase, with the control group that feeds GDP also up 0.5%.

The Atlanta Fed's GDPNow tracker promptly revised second-quarter real GDP growth from 3.7% to 4.0% annualized.

The piece that mattered most for the curve was import prices. The index rose 4.2% year-over-year in April, the highest annual pace since October 2022, driven by a 19% surge in petroleum prices as the Strait of Hormuz remains closed and oil holds near $100 per barrel.

Earlier this week, the producer inflation report came in far hotter than expected, with headline producer prices jumping by 1.4% month-on-month in April, and by 6% on an annual basis — both marking the highest acceleration in four years.

"We had based our Fed rate call on the assumption that the U.S. was relatively isolated from imported energy inflation, but Wednesday's data somewhat brings this view into question, with the geopolitical shock acting to further amplify sticky price pressures in both services and shelter," said Matthew Ryan, global head of market strategy at Ebury.

Friday's Risk-Off: AI Stocks, Gold, Silver, Copper All Take the Hit

The premarket tape on Friday made the cross-asset repricing explicit.

Futures on major U.S. indices were down over 1%, with the Nasdaq 100 slipping 1.9%.

The worst-performing Nasdaq 100 names in the premarket were the AI infrastructure stocks that have powered the index to records.

Marvell Technology Inc. (MRVL) dropped 5.57%. Intel Corp. (INTC) fell 4.60%. ASML Holding N.V. (ASML) lost 4.21%. Arm Holdings plc (ARM) was down 4.08%.

In the broader S&P 500, the same theme repeated. Coherent Corp. (COHR) led losses at 4.80%, followed by Intel at 4.22%, with Corning Inc. (GLW) and Lumentum Holdings Inc. (LITE) close behind.

The mechanism is straightforward. AI infrastructure stocks carry the longest equity duration in the index — most of their valuation lives in cash flows still years away — and they have been the biggest source of S&P 500 gains since the war began.

The metals complex told the same story without the equity-duration translation layer. Gold dropped 2.09% to $4,554 per ounce. Silver collapsed 5.93% to $78.45. Copper slid 4.36% to $6.28 per pound.