Fed Rate-Hike Odds Top 75% as Treasury Yields Surge and Oil Breaks $108

WASHINGTON — Markets now see more than a 75 percent chance that the Federal Reserve will raise its benchmark interest rate by a quarter-percentage point at its October meeting, as a sell-off in U.S. government debt and surging oil prices add pressure on Chair Kevin Warsh.

The CME Group’s FedWatch barometer, based on fed funds futures pricing, showed the increased odds of a 25 basis point move by the Federal Open Market Committee (FOMC). Traders reassessed the outlook after Treasury yields climbed sharply and geopolitical risks in the Middle East intensified.

Brent crude, the international benchmark, rose above $108 a barrel during morning trading as markets followed high-stakes diplomatic exchanges between Washington and Tehran. The talks came amid high-level contacts surrounding the United Nations General Assembly. Addressing the U.N., Iranian President Masoud Pezeshkian said Iran would never “bend the knee,” while adding that the country was “ready for dialogue and diplomacy.” President Donald Trump described a choice between entering negotiations and seeking to “annihilate” the regime.

The bond sell-off pushed the 10-year U.S. Treasury yield above 5.1 percent, a level not seen in nearly two decades and its biggest one-day jump since the broader market volatility following “Liberation Day” in April 2025. The 30-year Treasury yield also moved above 5.4 percent. Yields rise as bond prices fall, reflecting investors’ demand for more compensation to hold long-term government debt.

Deutsche Bank strategist Jim Reid wrote in a client note that the move in the 10-year yield marked a high point in the post-2007 era. He also pointed to weak demand at a Treasury Department auction of $70 billion in five-year notes, which yielded 5.03 percent. The auction tailed by 3.1 basis points above its pre-sale yield, indicating that primary dealers and institutional investors required higher yields to absorb the growing supply of U.S. debt.

Higher energy prices threaten to reignite headline inflation and lift long-term consumer inflation expectations. Macquarie global strategist Thierry Wizman said the results of diplomatic talks would help determine whether disruptions in energy markets persist.

“The direction of crude oil prices still bears on what happens to inflation globally and the decisions taken by central banks in response,” Wizman wrote in a note to clients. “We have seen every major central bank (including the U.S.’s Fed) cite either energy prices or ‘geopolitics’ as a driver of decision-making going forward. It is the key reason behind recent ‘hawkish’ rhetoric.”

The Federal Reserve’s statutory dual mandate, set by Congress, is to maintain maximum employment and stable prices. The central bank targets average annual inflation of 2 percent, measured by the Personal Consumption Expenditures (PCE) price index. Policymakers have historically preferred to “look through” temporary energy supply shocks, but sustained price increases can spread to other goods and services, leaving the Fed to keep borrowing costs high even if economic growth slows.

The FOMC raised interest rates at its September meeting, confronting supply-driven price pressures. President Trump sharply criticized the decision and has repeatedly called for lower rates to stimulate economic activity. After the increase, he suggested Warsh favored a more dovish policy but had voted with the 12-member committee’s consensus out of deference to other members rather than conviction.

Trump also suggested the central bank was acting for political reasons. Federal Reserve officials reject that charge as they seek to maintain a boundary between monetary policy and executive branch preferences. Wall Street analysts have increasingly argued that further tightening may be needed to protect the Fed’s institutional credibility and keep inflation expectations anchored.

Bank of America economists said higher rates, despite friction with the White House, could give the Fed an opportunity to demonstrate its commitment to price stability. The bank’s U.S. economics team maintained its forecast for two more rate increases before the end of the year, at the October and December FOMC meetings.

“Fed hikes looked politically challenging a few months ago, but they increasingly seem like an opportunity for Chair Warsh to burnish his legacy,” Bank of America wrote. “The robustness of the nominal economy both increases the risks of inflation persistence and reduces the risks that hikes will cause a recession. However, if supply shocks prove persistent, the Fed might eventually have to choose between an extended inflation overshoot and a hard landing.”