Fed Hike Odds Reach 76.8% as AI Credit Costs Climb

By Rebecca Stone

CME FedWatch futures put a 25-basis-point December Fed hike at 76.8% on Nov. 6, up from 66.9% a week earlier after U.S. payrolls rose 165,000. Reuters estimated about 78%, below 85% immediately after the release but above 67% on Thursday.

What changed the Fed's December calculus?

The repricing started in equities. On Nov. 5, the Nasdaq fell about 5.5%, its biggest one-day drop in 19 months, and entered a correction; chip stocks plunged 12%. The index lost 3.4% for the week, its fourth straight decline.

Reuters partly tied the selloff to Democratic election wins raising the prospect of tighter rules for AI data centers.

The Fed raised its target range 25 basis points in September to 3.75%-4.00%, then held it on Oct. 28. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented for another increase. A December hike would lift the range to 4.00%-4.25%.

San Francisco Fed President Mary Daly told CNBC on Friday: “My expectation is, we're going to have to tighten policy further.” Timing and size remain unclear, she said, and officials should be “deliberate but more gradual.” She called the technology-stock repricing “painful” but “orderly,” reflecting a reassessment of AI-driven demand risk.

St. Louis Fed President Alberto Musalem, who favors more increases, said AI investment “will continue to contribute to inflation.” AI demand also pushes up commodities such as copper, Reuters reported. Fed Chair Kevin Warsh said last month policymakers would watch “the accumulation of data” before deciding.

October payrolls rose 165,000 versus a 12-month average of 48,000 a month. The Labor Department revised August and September up to 186,000 and 60,000. Unemployment stood at 4.1%. Average hourly earnings gained 0.4% in October and 3.1% from a year earlier.

Fitch Ratings’ Olu Sonola called the report very strong and said it keeps the Fed focused on inflation. Before the Dec. 8-9 meeting come October consumer prices on Nov. 10 and November payrolls on Dec. 4. Reuters reported traders now expect the cycle’s last hike in April rather than June.

Why didn't long yields follow?

On Nov. 6, the two-year Treasury yield, most sensitive to expected Fed policy, rose to 4.51% from 4.46% the prior day, 24/7 Wall St. said. The 10-year edged up to 4.86% from 4.84%. An MLQ calculation from Treasury data put their gap at 35 basis points, down from 47.

Long-duration growth stocks, including most AI names, depend on profits years ahead and stay exposed to long-term yields. Those yields retreated: the 10-year peaked at 5.31% on Oct. 5, while the 30-year reached 5.66%; by Nov. 6, they stood at 4.86% and 5.26%.

Reuters said traders earlier pared December bets because an AI slowdown could cool growth. Treasury’s daily par yield curve shows the 2026 Friday closing-yield path:

• Sept. 4: 2-year 4.37%; 10-year 4.78%.
• Sept. 11: 2-year 4.63%; 10-year 4.96%.
• Sept. 18: 2-year 4.76%; 10-year 5.01%.
• Sept. 25: 2-year 4.81%; 10-year 5.17%.
• Oct. 2: 2-year 4.83%; 10-year 5.28%.
• Oct. 9: 2-year 4.80%; 10-year 5.24%.
• Oct. 16: 2-year 4.74%; 10-year 5.09%.
• Oct. 23: 2-year 4.69%; 10-year 5.00%.
• Oct. 30: 2-year 4.56%; 10-year 4.94%.
• Nov. 6: 2-year 4.51%; 10-year 4.86%.

On Oct. 30, Bank of America strategists led by Michael Hartnett argued higher yields were already hurting the AI rally as bond markets rein in hyperscaler capital spending. Investing.com reported his description: “classic painful tightening stuff but not mortal unless job losses/credit event.”

He listed an end to rate hikes among what risk assets need in the first half of 2027.

Where is AI feeling the squeeze?

Credit did the damage. For AI companies, tighter money is arriving through credit markets more than Treasury yields. The AI buildout relies heavily on borrowing.

Goldman Sachs counts five AI bond deals totaling $67 billion since Oct. 29, lifting hyperscaler debt issuance this year to $296 billion.

It forecasts $440 billion next year plus $300 billion of project-level debt, CNBC reported. Goldman also said hyperscalers collectively had negative free cash flow in the third quarter as capital spending exceeded operating cash flow. Bank of America expects AI-related credit issuance to rise 31% to $685 billion in