Stocks could retest the June lows, as investors re-evaluate the outlook for interest rates after August’s disappointing consumer inflation report. The consumer price index for August rose 0.1%, while economists had expected it to decline by 0.1%. That kicked off speculation the Fed would be even more aggressive about raising interest rates, with some pros even betting on a full percentage point hike coming as soon as next week. In reaction, stocks sold off hard, the dollar rallied and bond yields rose. The 10-year Treasury yield climbed back towards the high of the year, briefly touching 3.46%. The high of 3.49%, by the way, happened to be in mid-June, just about when stocks were bottoming and the S & P 500 hit a low of 3,636. The S & P 500 plunged 4.3% Tuesday to close at 3,932.69. Higher interest rates are a negative for stocks, particularly highly valued growth and tech names that do best when money is cheap. Rising yields can also make bonds look like more attractive investments, particularly when stock prices are falling. “Things are being called into question,” said Sam Stovall, chief market strategist at CFRA. “Will we get the seasonal low in October? Will we get the annual end of year rally in mid-term election years?” Stovall said he had expected the market would follow the course it typically follows in mid-term election years, with the market selling off in September and October but then rallying in the fourth quarter. Now, if investors are unclear on the path of inflation and how high the Federal Reserve will have to raise interest rates, that could challenge assumptions that historic patterns would be repeated. In every mid-term year since World War II, Stovall said the stock market gained on a total return basis from Oct. 31 through Oct. 31 of the following year. The average total return was 21%. “People are really starting to question GDP growth, interest rate projections, earnings forecasts, seasonal patterns and historical precedent,” he said. The CPI report was a harsh slap for a market that had advanced going into the report. “The market rallied five days into what it thought was going to be a light number and it really had no business doing that,” said Scott Redler, partner with T3Live.com. “The market does not feel good…Today it feels like everybody was wrong.” Redler said the next test for the S & P will be whether it can hold 3,900 and, if not, a test of the June low is possible. Investors had been lulled into a view that the Fed would raise rates just so much and then pause by the end of the year or early next year. But on Tuesday, after the CPI report, there was a violent repricing of expectations. The futures market, for instance, had priced in a high in the fed funds of 4% for next April, but that expectation quickly jumped to 4.33% after the latest CPI. That high is considered the expectation for the terminal rate — the end point where the Fed stops raising rates. “People who thought a pivot process would happen sooner are now thinking later, as inflation remains stickier,” said Redler. Quincy Krosby, LPL chief global strategist, said the June low is very much in play again, and it could be decided by the Fed itself when it meets next week. Most economists expect the Fed will raise rates by 0.75 basis points, its third such hike in a row. A basis point equals 0.01 of a percentage point. But there are growing expectations that the Fed could be more aggressive at later meetings, keeping rate hikes larger for longer. Economists at Nomura even switched their forecast to expect a full percentage point hike next week. The Fed meets next Tuesday and Wednesday, with a briefing by Fed Chairman Jerome Powell Wednesday afternoon. “The Federal Reserve press conference is equal in drama to the Jackson Hole meeting,” said Krosby. Powell was surprisingly hawkish in short prepared remarks in Jackson Hole, Wyoming last month. “If he repeats his performance at Jackson Hole at the press conference, the market could turn and say he says what he means and he means what he says,” she said. That would be a negative for stocks, and could trigger a retest of the lows.