Traders are shifting their outlook on possible rate changes by the U.S. central bank following recent inflation data. The consumer-price index for January exceeded expectations, hinting at ongoing inflation challenges faced by the Federal Reserve. This has led to the consideration of a potential rate hike in 2024, a scenario that was previously deemed unlikely.

In response to the inflation data, there is a small probability of another Fed rate hike in the next three months, as indicated in options on the Secured Overnight Financing Rate. Bill Dudley, former president of the New York Fed, warned that current interest rate levels may not be sufficient to constrain U.S. growth. The market is cautiously exploring the idea of a rate hike, with the possibility gaining traction among some traders.

Market experts have noted that the elusive prospect of a rate increase is resurfacing, with several Federal Open Market Committee members, including Fed Chairman Jerome Powell, keeping the option open for discussion. Furthermore, discussions around the neutral rate of interest and its impact on economic stimulation have contributed to the evolving rate hike narrative.

The potential of a Fed rate hike poses risks to financial markets, particularly as it is not currently factored into the 10-year Treasury yield. Rising Treasury yields and prolonged higher interest rates could unsettle investors, impacting stock positions.

Investors are eagerly awaiting the release of the Fed's meeting minutes on Wednesday, which may shed light on policymakers' stance on inflation and potential rate adjustments. With expectations settling around at least three quarter-point Fed rate cuts by December, the focus is on how policymakers will react to the latest inflation figures.

As financial markets returned from the Presidents Day weekend on a cautious note, attention is now directed towards Wednesday's earnings results from Nvidia Corp., a key event anticipated by market participants.