Oil prices cracking $100 a barrel have done in one week what months of Federal Reserve deliberation could not: convinced markets that the next move in borrowing costs may be up, not down.
Fed funds futures traders priced in an 82% probability of a rate hike at the Federal Open Market Committee's (FOMC) September meeting by Thursday — up from 52% just one week earlier, according to CME Group's FedWatch tool.
The central bank is still widely expected to leave its benchmark rate unchanged at 3.50% to 3.75% when the FOMC convenes July 28-29 — a fifth consecutive hold.
But even that outcome now carries an increasingly vocal minority view: futures markets put the probability of a July hike at nearly 38%, compared to less than 12% a week earlier.
Brent crude, the global oil benchmark, topped $100 per barrel on Thursday for the first time since late May, driven by a fresh round of hostilities between the US and Iran.
The average price of a gallon of regular gasoline reached $4 this wee, the highest in more than a month, according to AAA, threatening to reignite inflation at the moment the Fed had hoped to let price pressures ease.
A labor market that gives the Fed no cover
Thursday's jobless claims data removed whatever buffer the central bank might have drawn from softening employment conditions. Initial claims fell to 187,000 for the week ending July 18, well below the 212,000 consensus estimate from Dow Jones economists.
The combination — a tight labor market alongside surging energy costs — is precisely the scenario Fed Chair Kevin Warsh most wanted to avoid heading into the second half of 2026.
At June's FOMC meeting, nine of the 18 officials who submitted projections indicated the federal funds rate should finish 2026 above its current range, with the median year-end estimate rising to 3.8% from 3.4% in March. Warsh declined to submit an individual forecast.
September now the meeting mortgage professionals must watch
Mortgage rates have moved to reflect the repricing. The 30-year fixed rate currently sits at 6.58%, according to Freddie Mac, its highest level in nearly 12 months.
Melissa Cohn, Regional Vice President of William Raveis Mortgage and a 44-year industry veteran, told Mortgage Professional America the outlook for the July meeting is straightforward, and the path beyond it increasingly is not.
"Because oil is back at $100 per barrel, and bond yields are flying higher, inflation is rearing its ugly head," Cohn said.
"At this point, I would say that the Fed would state that their next move would be more likely to be a rate hike than a rate cut."
On what is ultimately driving rates higher, Cohn was unambiguous: "It's all about Iran, and for anyone to say anything different, it is just not true."
Looking past July, Cohn said the September meeting carries real risk for borrowers.
"Unless things turn around dramatically over the course of the next few months, the odds are that there's a potential rate hike in September," she said.
"If inflation gets out of control, the Fed is going to have to work harder to fight it."
She also offered a note of nuance for broker clients dreading the scenario: "While the Fed hiking rates makes borrowing costs overall more expensive, it also sends a message to the markets that the Fed means business with inflation, and the bond market can rally on that kind of news."
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