Investors are increasingly preparing for the Federal Reserve to lift borrowing costs amid rising oil prices, according to CNBC. Fed funds futures tracked by CME’s FedWatch tool indicate an 82% likelihood that the central bank will hike interest rates at its September policy meeting, up from below 53% a week prior.
Investors Price in Federal Reserve Rate Hike as Oil Prices Surge
While the central bank is broadly expected to keep rates unchanged at its current range of 3.50% to 3.75% at its gathering the following week, a growing minority is planning for an increase. Fed funds futures indicate a nearly 38% probability of a quarter-percentage-point hike for that meeting, up from less than 12% a week earlier.
Energy Shocks and Labor Market Strength
Global crude benchmark Brent hit $100 a barrel for the first time since late May, driven by a new round of attacks between the U.S. and Iran, according to CNBC. The conflict has triggered transit disruptions and blockades in the Strait of Hormuz, tightening the global market and threatening cost-push inflation as noted by FXCM Markets. Additionally, the average price for a gallon of gasoline in the U.S. reached $4, the highest in more than a month.
Employment figures released by the Labor Department bolstered the view that the Fed can focus more heavily on inflation rather than labor market health, as initial jobless claims dropped to 187,000 in the week ended July 18 — the fewest claims since 1969. Christopher Rupkey, chief economist at FWDBONDS, stated that economic growth is showing signs of overheating based on the weekly jobless claims figures.
Leadership and Policy Divisions at the Central Bank
The shifting economic landscape collides with a divided rate-setting committee led by Federal Reserve Chair Kevin Warsh, who replaced Jerome Powell on May 22. In his first appearance before Congress on July 14, Warsh told the House Financial Services Committee that policymakers have no tolerance for persistently elevated inflation
and shared a resolute commitment to restoring price stability,
according to 2822news. Warsh has vowed repeatedly over the prior two months to restore price stability and disabuse investors of the idea that the Fed implicitly accepts higher inflation, though he has not spelled out how current interest rates will accomplish that, WSJ reports.
Forecasts released in June showed a sharply divided committee, with about half of the 19 policymakers penciling in higher interest rates by the end of the year, while another half signaled support for keeping rates unchanged or cutting them.
Broader Market Impact and Economic Outlook
Rising expectations for a rate increase have added downward pressure on the stock market, alongside surging Treasury yields and a post-earnings decline in Alphabet, according to Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report. The blue-chip Dow Jones Industrial Average tumbled about 500 points, while the Nasdaq Composite shed more than 2%.
Despite near-term tightening bets, consensus forecasts from FactSet indicate that economists still do not expect the Fed to hike rates across the entirety of 2026, anticipating instead that the central bank will lower borrowing costs by half a percentage point in 2027.
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