Federal Reserve set to raise interest rates amid oil flow disruptions

The Federal Reserve is poised to raise interest rates for the first time in three years, with markets pricing in an 86% to 92% probability of a 25 basis point hike at the FOMC meeting scheduled for September 16-17, a shift driven by soaring energy costs that are reigniting inflation fears across the board. The 10-year Treasury yield recently touched 5%.

Oil is running the show

Brent crude has surged past $107 per barrel, with West Texas Intermediate trading around $103. The culprit: escalating geopolitical tensions between the US and Iran that have turned key Middle Eastern energy infrastructure into collateral damage.

Saudi Arabia’s East-West pipeline, which handles between 4 and 7 million barrels per day, was shut down following drone attacks. Meanwhile, Houthi forces are ramping up threats near the Bab el-Mandeb Strait, one of the most critical maritime chokepoints for global energy trade.

Gold takes the hit

Gold prices fell over 1% to approximately $4,290 per ounce as of September 14, marking a five-week low. Gold doesn’t pay interest. When the Fed raises rates, holding dollars or Treasuries becomes more attractive relative to sitting on a pile of metal that just… sits there. Higher rates strengthen the dollar, and a stronger dollar makes gold more expensive for international buyers, further dampening demand.

Goldman Sachs and JPMorgan have both revised their Fed hike forecasts following fresh inflation data and the oil price spike.

The rate hike calculus

The Fed’s decision this week carries unusual weight because of the source of the inflationary pressure. Supply-driven inflation from geopolitical disruptions is notoriously difficult for central banks to manage. Raising rates doesn’t produce more oil or reopen pipelines.

Equity investors face their own set of calculations. Energy stocks stand to benefit from elevated crude prices, but broader market sentiment tends to sour when rate hikes arrive, particularly when they’re driven by supply shocks rather than robust economic growth.

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