The Federal Open Market Committee opened its two-day September meeting Tuesday with futures markets pricing a 93% chance of a quarter-point rate increase, which would be the first since July 2023. The decision lands Wednesday at 2 p.m. ET, followed by Chair Kevin Warsh’s news conference and an updated Summary of Economic Projections with a fresh dot plot.
Why the market flipped
Two weeks ago a hold was the consensus. The August consumer price index, released last week, showed inflation accelerating to 3.2% year over year from 2.9% in July, well above the Fed’s 2% target, and futures traders moved to pricing two quarter-point increases by year-end. Warsh, who took over as chair this year, has warned repeatedly that inflation remains above target and that prices should be the central bank’s main focus.Not everyone on the committee agrees. Fed Governor Christopher Waller said Monday he would support holding rates steady at the September meeting, conceding that inflation is meaningfully above target but arguing recent trends suggest the pressure is easing. The split sets up the most consequential decision of Warsh’s tenure so far. If he delivers a hike after Waller’s public dissent, the committee’s internal disagreement becomes visible in the vote itself, and markets will read the dissent list as closely as the statement. Waller’s position also carries political weight: a chair who is overruled by his own committee in his first hike cycle invites questions about who is actually setting policy, a comparison commentators have already drawn to the Treasury Secretary and to Waller himself as a potential shadow chair.
Bond markets already moved
The 10-year Treasury yield closed at 4.97% Monday, the highest close of 2026, and traded at 5.00% Tuesday morning before touching 5.02% intraday, a level last seen in 2007. The 30-year closed at 5.34% and traded near 5.37%. The 10-year real yield, which strips out inflation expectations, closed Monday at 2.60%, its highest reading of the year. Equities fell for a second session, with chipmakers and AI infrastructure names leading the decline on worries the technology trade has run ahead of itself. The Nasdaq Composite fell 0.8% Monday to 26,129, the S&P 500 lost 0.6% to 7,607, and the Dow slipped 0.4% to 52,369.Energy is the driver behind the repricing. Brent crude climbed toward $108 a barrel after strikes on Saudi infrastructure and renewed fighting around the Strait of Hormuz, up more than 65% this year. West Texas Intermediate gained 3.2% Monday to $103.29, up 20% for the month. Higher oil feeds directly into gasoline and household energy bills, which is the channel central bankers keep pointing to when they explain why they cannot look through the shock. President Trump has argued gas prices will come down after the midterms, a claim traders are not pricing.
What to watch Wednesday
Three things matter beyond the headline rate. First, the dot plot itself, which will show how far the committee has moved from June’s single-hike projection to a 3.8% median. Deutsche Bank economists expect several revisions pointing toward a slightly stronger economic outlook, a median dot implying another increase this year, and several officials projecting more than that. Second, whether Warsh’s statement and press conference provide any forward guidance at all. His preference for minimalist communication has reduced the Fed’s reliance on guidance, which makes Treasury yields more sensitive to each inflation print rather than to meeting rhetoric. Third, the dissents. A Waller dissent against a hike would be the clearest public signal yet of the split inside the committee.
| Indicator | Current level | Context |
|---|---|---|
| Fed hike probability (futures) | 93% | First hike since July 2023 |
| 10-year Treasury yield | 5.02% intraday | Highest since 2007 |
| August CPI, year over year | 3.2% | Up from 2.9% in July |
| Brent crude | Near $108 | Up more than 65% in 2026 |
| June dot plot median | 3.8% by end-2026 | One hike projected |
The rest of the world
The Fed is not alone in facing energy-driven inflation. The European Central Bank raised rates last week to fight an inflation rate expected to average 2.6% this year, a revision up from an earlier projection that inflation would slightly undershoot target. Citigroup and Goldman Sachs dropped their UK hold calls Monday, forecasting Bank of England increases in November and possibly February as energy costs rebuild British inflation. Governor Andrew Bailey held rates last week while warning that higher energy prices would feed into household bills later in the year.The Bank of Japan already hiked to 1% earlier this year, a 31-year high, and markets watch whether it moves again. Before the war escalated, a consensus was forming that Japan could lift rates again soon as wages outpaced inflation. Surging energy prices have scrambled that calculus, squeezing Japanese households and slowing the normalization story.The pattern across central banks is the same: the war in the Middle East pushed energy prices up, energy pushed headline inflation up, and headline inflation is forcing policy tighter even where growth is softening. For emerging markets, the combination of a hiking Fed and expensive oil is the hardest version of both problems at once, since dollar debt gets more expensive exactly when import bills rise.
For crypto and risk assets, the meeting is the week’s largest scheduled event. Bitcoin fell below $76,000 Tuesday as hike odds firmed and the Senate prepared for a separate vote on the CLARITY Act, and the 10-year yield’s move above 5% has left little room for the liquidity-driven bid that carried risk assets through August, when bitcoin gained 24%, its strongest month since November 2024. A hawkish dot plot on top of a hike would extend that pressure; a hold with a neutral dot plot would catch positioning the other way and could produce a violent squeeze in the derivatives market, where Coinglass maps more than $2.5 billion in liquidation clusters within a few percent of spot.