On Monday, Federal Reserve Governor Christopher Waller made a statement that’s worth paying attention to. He stated that if Tuesday’s June CPI report shows another hot core reading, the FOMC will need to consider tightening monetary policy in the near term.These remarks suggest the Federal Reserve is keeping the door open to a more hawkish policy stance should inflation prove more persistent than expected.Why the Fed Is Worried About Inflation AgainThe Federal Reserve’s priorities have changed dramatically over the past year. Previously, the main concern was a weakening labor market, which supported the case for lower interest rates.Right now, bringing inflation back under control has once again become the central priority, suggesting that policymakers may be willing to keep interest rates higher for longer, or even tighten policy further if inflation continues to move away from the Fed’s 2% target.Headline CPI hits 4.2% year-over-year in May, the hottest reading since April 2023, while core inflation (excluding food and energy) held at 2.9%, comfortably above the Fed’s 2% target.At its June meeting, the first under new Chair Kevin Warsh, the Fed revised its median 2026 inflation forecast up to 3.6% from 2.7%, and lifted the projection of its median Fed Funds Rate to 3.8% from 3.4%.Roughly half of Federal Reserve officials now expect at least one additional interest rate hike before the end of the year.A major reason for this forecast is energy prices. Oil surged sharply between January and April as the Israel-Iran conflict disrupted shipping through the Strait of Hormuz.Even though the mid-June ceasefire temporarily eased concerns, the renewed rally and disruption have re-escalated things, underscoring how vulnerable inflation remains to geopolitical shocks and why the Fed is becoming increasingly cautious about declaring victory over rising prices.September’s Rate Cut Hopes Hinge on June’s CPI ReportEconomists expect Tuesday’s CPI report to show that headline inflation eased in June, with the annual rate falling to around 3.8% from 4.2% in May. Much of the expected decline is being driven by lower gasoline prices during June rather than a broad-based slowdown in inflation.Core CPI, which strips out the more volatile food and energy components and is closely watched by the Federal Reserve, is expected to drop to 2.8% from 2.9%, which suggests underlying inflationary pressures have not eased as much as the headline number might imply.This matters because the Fed’s policy decisions are driven more by persistent inflation than temporary swings in energy prices.For now, markets largely expect September to be the next realistic window for a rate cut. That outlook, however, depends heavily on Tuesday’s CPI report.If core inflation comes in hotter than expected, investors may be forced to reassess the policy outlook. In that scenario, markets could begin pricing in a more hawkish Federal Reserve, driving Treasury yields higher and reducing expectations for near-term rate cuts.What Investors Should Be WatchingA sustained higher rate puts pressure on some parts of the market more than others, and investors need to know this.Growth and technology stocks, whose valuations rely heavily on future earnings, typically become less attractive as higher interest rates reduce the present value of expected profits.On the other hand, financial stocks could be better positioned in a higher-rate environment, as banks often benefit from stronger net interest margins. Investors may also gravitate toward high-quality companies with strong cash flows and the ability to pass higher costs on to customers. These businesses have historically been more resilient during periods when the Federal Reserve is tightening monetary policy.In fixed income, duration is the key risk. Shorter-dated Treasuries offer more insulation than long bonds if yields keep climbing. The 2-year Treasury yield is worth watching closely in the days ahead. Because it is highly sensitive to expectations for Federal Reserve policy, it often serves as one of the market’s earliest signals for either an upward or downward path of interest rates.The Bottom LineWaller’s comments sound less like a prediction and more like a warning that the Fed is prepared to act if inflation remains persistent. With inflation proving more stubborn than expected in recent months, policymakers appear determined not to fall behind the curve again.Tuesday’s CPI report is likely to show a softer headline inflation reading but little improvement in core inflation. That combination may not be enough to justify a rate hike this month, but it would keep the possibility of one in September firmly on the table.