By Ambar Warrick

Investing.com-- Financial markets are now pricing in the potential for a 100 basis-point interest rate hike by the Federal Reserve next week, after U.S. CPI inflation came in higher than expected for August.

According to exchange operator CME Group’s FedWatch tool, traders have begun pricing in a 35% chance that the central bank will raise rates by a full percentage point during its meeting on Sept. 21. The remaining 65% expect the Fed to raise rates by 75 basis points (bps).

Traders now appear to have withdrawn all expectations that the Fed will raise rates by 50 bps, after data on Tuesday showed that the U.S. consumer price index eased less than expected in August.

The data indicates that while U.S. inflation is coming off a 40-year peak hit in June, it is likely to take much longer to reach the Fed’s target rate of 2%. The central bank is as such expected to keep raising rates until such a scenario is met.

Markets have also begun pricing in the possibility that the U.S. benchmark rate will end the year above 4%. Such a scenario involves two more 75 bps hikes by the Fed, followed by a milder 25 bps hike in its last meeting for the year.

“The breadth and stickiness of inflation pressures has seen the market shift its expectations for the terminal rate up to 4-4.25% from the 3.75-4% range before the release,” analysts at ING wrote in a note. But the bank still expects U.S. interest rates to finish the year at 4%.

August’s CPI reading caused a sharp selldown in financial markets on Tuesday, with Wall Street indexes plummeting between 3.9% and 5.2%. Losses spilled over into the Asian session on Wednesday.

10-year Treasury yields surged to a three-month high after the reading, while the dollar hovered just below 20-year peaks hit last week.

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