Financial-market participants are focusing their attention on where Federal Reserve policy makers are most likely to take their main policy rate in September, with hopes slipping that they could back off of half-point increases after delivering similar-size hikes in June and July.

Remarks by Fed Gov. Christopher Waller, who said on Monday that he supports hiking by half-point increments for several meetings until he sees signs of inflation coming down, set the tone for markets on Tuesday following the three-day Memorial Day weekend. U.S. stocks sold off, Treasury yields were sharply higher, and traders were back to pricing in a more than 50% chance of a half-point hike in September.

Investors have been holding out hope that the U.S. central bank could either return to quarter-point moves or stop and reassess, after pushing through a 50 basis point hike on May 4 and likely to undertake similar moves in June and July — which would take the fed-funds rate target up to between 1.75% to 2%. Expectations for a less aggressive pace of tightening afterward were underscored last week by another policy maker, Atlanta Fed President Raphael Bostic, who said that a “pause” in September might be justified.

“Markets are really looking for any light at the end of the inflation/Fed-hike tunnel. There’s a tail risk that the Fed has to hike to 4% and 5% to wring out inflation and cause a recession in the mean time, so people really latched onto the idea of a pause,” said Tom Graff, head of investments at Facet Wealth in Baltimore.

“Stocks are trading to the downside today on the dashing of that hope,” Graff said via phone. “The big rally in stocks last week shows us that if we can get inflation under control, there’s a lot of upside for stocks. The tail risk is that they (policy makers) can’t get inflation down and have to keep hiking far beyond where most people are thinking.”

Policy makers have penciled in a fed-funds rate that gets to 1.9% by year-end and to 2.8% in 2023 and 2024, based on the median estimates of their latest projections in March. Their next update is scheduled to be released at their June 14-15 meeting. Meanwhile, fed funds futures traders see a 53% chance that the rate gets to 2.75% to 3% by December, from its current level between 0.75% and 1%, based on the CME FedWatch Tool.

But the corner of the financial market which forecasts coming U.S. consumer-price index readings are warning of a worrisome outlook that hasn’t yet been factored into most investors’ thinking: Traders of derivatives-like instruments known as fixings have been pricing in five consecutive months of 8%-plus headline annual readings between May and September.

Read: Biden pledges Fed independence ahead of meeting with Powell

As of Tuesday morning, all three major stock indexes
DJIA,
-0.40%

SPX,
-0.29%

COMP,
+0.05%
were lower, led by a 0.7% drop in the S&P 500. Investors aggressively sold off government bonds, the asset class that gets hit hardest by high inflation, pushing yields on 7- to 30-year maturities up by more than 10 basis points each.