Expectations about how aggressive the Federal Reserve will be in raising interest rates in its ongoing fight against inflation hit a new high this week, exacerbating pressures on stocks and bonds.

As investors await another big increase in borrowing costs by the U.S. central bank at its September 20-21 meeting, better-than-expected inflation numbers have raised bets for the Fed’s so-called terminal rate, which is now projected at 4.45%, Refinitiv data showed.

That level is more than 2 percentage points above the current benchmark interest rate, and compares to a projection of a peak of around 3.7% just a month ago.

Higher interest rates are a potential unwelcome factor for stocks, which rose during the U.S. summer, while bond yields, which move inversely to prices, retreated from their highs on hopes that the Fed would moderate the pace of rate adjustments.
Those hopes were dashed earlier this week when the U.S. consumer price index for August showed that inflation came in at 8.3% on an annualized basis, above economists’ forecasts for an 8.1% rate.

“I think the Fed is going to put another 150 to 200 basis points of interest rate hikes on the market, but it’s the speed with which they will do that…that’s kind of the debate right now,” said Jeffrey Sherman, deputy chief investment officer at DoubleLine.

Expectations of a more aggressive Fed in fighting the price jump have also boosted real yields, which show how much an investor can earn annually by holding a U.S. government bond. A rise in these returns tends to weaken the allure of riskier assets.

And the picture is not much brighter for corporate debt.

“Investors don’t seem to have much confidence in the Fed’s ability to project a soft (or not so hard) landing,” said Danielle Poli, co-portfolio manager at Oaktree Diversified Income Fund.