September 16 FOMC rate hike of 25bp is basically a done deal; CME is pricing a 94.5% probability of a rate hike.
But I think what the market really needs to worry about isn’t this 25bp move. It’s when the oil price will come down. WTI Oil is already above $104, and the U.S. 10-year Treasury yield has also reached 5%. If this is just a geopolitical shock lasting a few weeks, the problem is actually not that big. But if oil prices stay at $100–110—or even higher—for 1–2 more months, energy costs will gradually feed into gasoline, transportation, commodity costs, and inflation expectations. Then the Fed won’t be dealing with a one-off oil price shock anymore; it could face a second-round inflation impact (even though the probability of that is low).
I still believe that what Trump most needs to do right now is to de-escalate the Iran situation as soon as possible, bringing oil prices back down. On the one hand, he wants low interest rates, and on the other, he allows geopolitical risks to keep oil prices above $100. These two goals are inherently in conflict. Even if Warsh is dovish again, he can’t ignore inflation that’s starting to reappear.
But I think what the market really needs to worry about isn’t this 25bp move. It’s when the oil price will come down. WTI Oil is already above $104, and the U.S. 10-year Treasury yield has also reached 5%. If this is just a geopolitical shock lasting a few weeks, the problem is actually not that big. But if oil prices stay at $100–110—or even higher—for 1–2 more months, energy costs will gradually feed into gasoline, transportation, commodity costs, and inflation expectations. Then the Fed won’t be dealing with a one-off oil price shock anymore; it could face a second-round inflation impact (even though the probability of that is low).
I still believe that what Trump most needs to do right now is to de-escalate the Iran situation as soon as possible, bringing oil prices back down. On the one hand, he wants low interest rates, and on the other, he allows geopolitical risks to keep oil prices above $100. These two goals are inherently in conflict. Even if Warsh is dovish again, he can’t ignore inflation that’s starting to reappear.
