Fed Governor Waller sends a hawkish signal: the probability of a rate hike in July rises to nearly 50%—how do AI inflation risks reshape market expectations?

On July 13, 2026, Christopher Waller, a Federal Reserve Governor, described the current monetary policy backdrop as a “crossroads” during a speech at the New York Association for Business Economics. The remarks quickly triggered a chain reaction in financial markets—money market pricing showed that the probability of the Fed hiking by 25 basis points in July rose sharply after Waller’s speech from less than 40% earlier that day to nearly 50%.

Waller’s core logic is not complicated: if the soon-to-be-released inflation data show that core inflation remains clearly above the 2% target, the Fed may need to further tighten monetary policy “in the near term.” He acknowledged that the Fed’s failure in 2021 to respond to high inflation in a timely manner was a mistake, and he said he is “determined to avoid repeating that mistake.”

But Waller’s stance is not one-sidedly hawkish. He also warned against falling into the mindset of “fighting the last war again”—tightening policy too early this time simply because the previous action came too late. He believes there are still “good reasons” to think inflation will gradually cool, but there is also a “completely reasonable” scenario in which inflation stays elevated or even rises further, requiring additional tightening of monetary policy in the short term.

This “dilemma framework” reflects growing policy divergence within the FOMC. Based on the June 2026 dot plot, nine participants expect one or more rate hikes in 2026, eight expect rates to remain unchanged, and one expects a rate cut. Fed Chair Kevin Woush had previously sent a more dovish signal at the European Central Bank forum, saying both inflation expectations and inflation risks had declined; while Waller’s latest comments represent the hawkish camp’s position among policymakers. Such divergence means the July 29 FOMC meeting will rely heavily on upcoming data—first and foremost the June CPI data to be released on July 14.

AI Capital Expenditure: An Overlooked New Inflation Variable

The most notable differentiated perspective in Waller’s speech is that he explicitly listed the “demand spillover effect brought by artificial intelligence” as one of the three drivers of inflation this cycle—along with the other two being energy price increases caused by tariffs implemented in 2025 and the conflict in the Middle East.

This analytical framework breaks the market’s prior consensus. Over the past two years, the mainstream narrative has generally held that AI is a disinflationary force—by improving production efficiency and thereby lowering costs. But Waller pointed to the other side: the explosive growth of the AI industry is transmitting real-economy inflation pressure through large-scale infrastructure investment.

Specifically, this transmission mechanism works through at least three channels:

Data center construction costs. Capital spending surges in AI by tech giants are driving up demand for and prices of land, electricity, and infrastructure. Building data centers itself requires large amounts of construction materials, engineering services, and energy inputs, and these demands are pushing up price levels in related areas.

High-end chip prices are sticky. AI demand is keeping GPU, HBM, and semiconductor equipment prices at high levels. Goldman Sachs previously warned that inflation in software and peripherals could peak by the end of 2026, with the estimated year-over-year rate as high as 30% by November. Memory inflation’s impact on the United States is larger than in other developed countries—software and peripherals account for about 1% of the contribution to U.S. PCE inflation, while in other developed countries it is below 0.5%.

Growth in energy demand. Rising electricity consumption by AI data centers is increasing overall energy demand. This factor is also resonating with the current geopolitical environment—oil prices have been pushed up again as the U.S. and Iran rekindle military conflict. West Texas Intermediate crude futures have risen by about 11% since July 13, nearing $80 per barrel; Brent crude futures jumped more than 9% on the 13th, to $83.3 per barrel.

Waller particularly emphasized that what he worries is inflation pressure spreading from “localized factors” such as tariffs and energy into broader areas of the economy. The Fed’s preferred inflation measure—core PCE—has risen to 3.4% over the one-year period through May, and it has “been rising steadily since January.” If this spillover trend continues, monetary policy would no longer face only temporary price shocks, but more systemic inflation pressure.

Market Repricing: From “Rate Cuts” to “Rate Hike Risk”

The market reaction to Waller’s remarks clearly demonstrates the magnitude of expectations shifting.

The two-year U.S. Treasury yield, which is most sensitive to policy expectations, briefly rose by 8 basis points to 4.29%, the highest since February 2025; the five-year yield rose to 4.37%. The benchmark 10-year U.S. Treasury yield increased by 6 basis points to 4.62%, the highest level since May. The rise in short-end yields far exceeded that in the long end, reflecting that the market is concentrating more on pricing “near-term” rate hikes.

This repricing comes against the backdrop that the market’s prior mainstream trading logic was: “inflation falling → Fed rate cuts → risk assets rising.” But Waller’s comments indicate that the probability of an alternative scenario is increasing: if core inflation cannot keep falling, the Fed may extend the tightening cycle and even resume hikes. Switching from a “rate cut trade” to “rate hike risk” is often accompanied by a sharp repricing of asset prices.

As of early trading in the Asian session on July 14, the U.S. Dollar Index was steady around 101.27. In the New York late session, the Dollar Index rose 0.34% to 101.31. Stronger rate-hike expectations typically provide support for the dollar; a stronger dollar, in turn, may add pressure on emerging-market assets, commodities, and risk assets.

In gold, in the short term, a rising dollar may weigh on gold prices; however, uncertainty over geopolitics and the widening of policy divergence could also provide support for safe-haven demand. This is a tug-of-war in both directions, and the ultimate direction depends on which force takes the lead.

U.S. Stocks Diverge: Tech Under Pressure, Energy and Banks Split

On July 14 (Beijing time), all three major U.S. stock indexes closed lower. The Dow Jones Industrial Average fell 138.37 points, or 0.26%, to 52,498.64; the S&P 500 dropped 60.05 points, or 0.79%, to 7,515.34; and the Nasdaq Composite fell 408.43 points, or 1.55%, to 25,873.18. The Nasdaq logged its biggest single-day decline in nearly three weeks.

Sector performance was highly divergent. Tech stocks led the declines, down 2.1%; energy stocks rose 3.2% against the trend, becoming the best-performing sector. The Philadelphia Semiconductor Index plunged 4.78%.

At the individual stock level (all figures are closing prices on July 14 Beijing time):

• Nvidia (NVDA) fell 3.52%, closing at $203.53
• Tesla (TSLA) fell 3.18%, closing at $394.76
• Meta (META) fell 1.86%, closing at $656.73
• Alphabet (GOOGL) fell 1.30%, closing at $352.51
• Micron Technology (MU) fell 4.30%
• Intel (INTC) fell 6.00%
• SanDisk (SNDK) plunged more than 12%

The broad adjustment across the AI industry chain was not an isolated event. SK hynix ADR tumbled more than 9%, near its issue price; sell-pressure in the South Korean stock market spilled over into the U.S. stock market. The market is concerned that some AI-related companies’ earnings may come in below expectations, and rising rate-hike expectations further compress valuations for high-multiple growth stocks.

From a valuation logic perspective, tech stocks are more sensitive to rate-hike expectations because their future cash flows have longer duration—an increase in the discount rate has a greater impact on the present value of distant cash flows. If the probability of a July hike remains at current levels or rises further, high-valuation growth stock sectors represented by the Nasdaq could face ongoing valuation compression pressure.

At the same time, banks and energy may follow different logics. If interest rates stay high or rise further, banks’ net interest margins could improve. Energy stocks directly benefit from geopolitics-driven oil price gains. This kind of sector divergence is itself a typical market response to the repricing of rate-hike expectations.

Bitcoin and Crypto Markets: Volatility Intensifies as Liquidity Expectations Tighten

The crypto market also faced pressure on July 14. After the escalation of the U.S.-Iran conflict and Waller’s hawkish remarks hit as back-to-back macro headwinds, Bitcoin (BTC) plunged early on July 14 and broke below the $62k threshold.

As of July 14, Bitcoin traded in a range of $62,200 to $62,500. The intraday high-low range was only about $130, indicating a clear low-volume consolidation pattern, with neither bulls nor bears showing strong conviction. Ethereum (ETH) slid toward around $1,750. According to CoinGlass data, in the past 24 hours the total liquidation amount across the entire network reached $377 million, with nearly 90k investors liquidated.

How the crypto market responds to rate-hike expectations needs to be understood within a more complex framework. The simplified logic of “rate hikes = Bitcoin down” is not sufficient. Rising rate-hike expectations mainly affect crypto assets through two channels:

Liquidity channel. Higher rates mean a higher risk-free return, increasing the opportunity cost of holding non-yielding crypto assets. Meanwhile, tighter liquidity may reduce the amount of capital allocated to risk assets. This is a short-term, mostly negative transmission path.

U.S. dollar channel. Stronger rate-hike expectations often support a stronger dollar, and a stronger dollar tends to put pressure on the prices of dollar-denominated crypto assets.

But Bitcoin’s long-term trajectory also depends on more structural factors: inflows and outflows to spot ETFs, institutional allocation trends, and global dollar liquidity conditions. In addition, the U.S. CLARITY Act has entered the final legislative推进 stage; more than 200 institutions recently urged the Senate to advance the bill. Improved regulatory certainty may offset, to some extent, the negative impact of tightening macro liquidity.

In the short term, the June CPI data to be released on July 14 will be the key variable. The market expects year-over-year overall CPI in June to ease from 4.2% in May to 3.8%, and core CPI to remain at 2.9%. If year-over-year core CPI climbs back above 3%, the probability that the Fed keeps rates high or even hikes could rise further. Crypto market volatility may be amplified significantly after the data release.

Conclusion: Three Key Indicators Determine the Next Direction

Waller’s speech refocused the market on a central question—whether inflation is truly steadily moving toward the 2% target. If the answer is no, then the policy path for the second half of 2026 will shift from the broadly expected “rates unchanged” to “rate-hike risk.”

Over the next period, three indicators are worth continuous monitoring:

June core CPI data (released July 14). This will be the first key data point after Waller’s remarks. If year-over-year core CPI rebounds to above 3%, the probability of a July hike may rise further. The market expects year-over-year core CPI at around 2.9%, and any deviation will trigger significant market volatility.

Follow-up remarks from Fed officials. Especially statements from Fed Chair Woush when he testifies before Congress in July. Disagreement within the FOMC means different officials’ comments may release different signals, and the market will piece together the full picture of the policy path from them.

U.S. Dollar Index and U.S. Treasury yields. These two indicators are the “thermometer” for how the market is pricing rate-hike expectations. If the two-year U.S. Treasury yield continues to rise and breaks above 4.30%, it will mean the market is further pricing in rate-hike risk.

For investors, the current environment suggests that the “rate cut trade” logic is being reassessed, and the pricing of “rate-hike risk” may not yet be fully completed. Whether it is U.S. stocks, gold, or crypto assets, rising volatility may be the most certain characteristic in the near term.

FAQ

Q: Did Waller clearly say there will definitely be a rate hike in July?

No. Waller said policymakers should wait for more economic data before deciding whether to hike; he tends to keep rates unchanged ahead of “several months” of core inflation declines. However, he kept the option of restarting tightening if inflation remains elevated.

Q: What does a 50% probability of a July rate hike mean?

It means the market believes the probabilities of hiking versus not hiking at the late-July FOMC meeting are roughly equal. This probability jumped quickly from less than 40% to nearly 50%, reflecting the significant impact of Waller’s remarks and the situation in the Middle East on market expectations.

Q: Why would AI be viewed by the Fed as an inflation risk?

Waller said the large-scale infrastructure buildout in the AI industry (data centers, power, and equipment investment) is spreading into the real economy, driving up prices of related raw materials, energy, and services. This is the first time Fed officials have explicitly listed AI capital expenditures as one of the inflation drivers.

Q: How much could rate-hike expectations affect the price of Bitcoin?

Rate-hike expectations mainly affect Bitcoin through two channels: tighter liquidity and a stronger dollar. Near-term volatility could intensify, but Bitcoin’s longer-term performance still depends on structural factors such as ETF fund flows, institutional allocation, and regulatory progress.

Q: Which U.S. stock sectors are most vulnerable under rate-hike expectations?

High-valuation tech growth stocks are most sensitive to changes in interest rates because the present value of their future cash flows is more affected by interest rates. On July 13, the Nasdaq fell 1.55%, with Nvidia down 3.52% and Tesla down 3.18%. Energy stocks and bank stocks may benefit from higher oil prices and improved interest margins.