Hotter September inflation, rising oil prices and a 10-year Treasury yield above 5% are complicating the Fed’s outlook.

  • According to TS Lombard’s Dario Perkins, the Fed could hike rates further if AI-driven demand keeps fueling inflation.
  • Oil rose on Wednesday after a Houthi attack on Saudi Arabia’s largest refinery, with Brent at $114.84 and WTI at $101.13 per barrel.
  • FedWatch Advisors’ Ben Emons said more tightening may be needed, as elevated energy prices and geopolitical tensions keep clouding the inflation outlook.

The Federal Reserve is ‘overwhelmingly likely’ to leave interest rates unchanged on Wednesday, according to Wolfe Research Chief Economist Stephanie Roth, who anticipates a pause in October despite persistent inflation pressures.

Roth told Bloomberg she expects Fed Chair Kevin Warsh and other policymakers to signal that further rate hikes remain on the table following hotter-than-expected September inflation data. 

The Fed is set to announce its policy decision at 2 p.m. ET, followed by a press conference with Chair Kevin Warsh at 2:30 p.m. ET.

Inflation Pressures Persist

September's Consumer Price Index (CPI) rose 3.7% year-over-year, accelerating from 3.4% in August, while core CPI increased 2.6%.

The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose 3.4% annually in August, with core PCE increasing 3.0%. September's PCE figures are due Thursday, with preliminary estimates suggesting inflation remains elevated.

According to Dario Perkins, managing director for global macro at TS Lombard, the Fed could face additional rate hikes if AI-driven demand continues to fuel inflation.

Oil Prices, AI Borrowing Add To Pressure

Ben Emons, CIO and founder of FedWatch Advisors, told CNBC that rising Treasury yields have already tightened financial conditions and weighed on housing activity, effectively doing some of the Fed's work.

However, Emons believes additional tightening may be necessary as elevated energy prices and geopolitical tensions continue to complicate the inflation outlook.

Oil prices rose Wednesday as investors assessed the risk of a prolonged and broader Middle East conflict following an attack by Iran-backed Houthi militants on Saudi Arabia’s largest refinery.

Brent crude futures maturing in December rose 0.8% to 114.84 per barrel, while U.S. West Texas Intermediate (WTI) crude futures for December delivery rose over 1% to $101.13 per barrel.

Oil-linked ETFs, including the United States Oil Fund (USO) and ProShares Ultra Bloomberg Crude Oil (UCO), gained over 1% premarket. Retail investors’ sentiment around USO remained ‘neutral’ for USO but ‘bearish’ for UCO on Stocktwits.

Treasury Yields Edge Higher Ahead of Fed Outcome

Bond yields edged higher, with the 10-year Treasury note yield rising more than 2 basis points to 5.0134%. The 2-year Treasury note yield rose 1 basis point to 4.7494%. Meanwhile, the yield on the longer-dated 30-year U.S. Treasury also rose more than 1 basis point to 5.3200%.

Treasury bond ETFs, including the iShares 20+ Year Treasury Bond ETF (TLT) and iShares 7-10 Year Treasury Bond ETF (IEF), traded marginally in the red ahead of the Fed decision. Retail sentiment around both tickers on Stocktwits was ‘bearish’.

Emons highlighted AI infrastructure-related borrowing and associated Treasury-selling activity as additional pressures on bond yields. He agreed that the 10-year Treasury yield could exceed 5.5% by year-end.

See Also: Bitcoin On Track To Post Weakest October In Six Years As US Buyers Retreat Ahead Of Fed Decision

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