Global financial markets are entering September with a daunting combination of pressures that threatens to upend assumptions about central bank policy worldwide. Surging oil prices, persistent inflation, and a newly hawkish Federal Reserve are forcing investors and policymakers alike to rewrite their playbooks at a time when geopolitical risks show no sign of abating.
Brent crude rose back above $90 a barrel early Monday, reaching $90.31 in Asia trading before settling near $91 by midday. West Texas Intermediate climbed to around $86. The move came after US forces struck Iranian launchers over the weekend amid reports that Iran was preparing to deploy mines in the Strait of Hormuz, one of the world’s most critical energy chokepoints. The jump extended a rally that has seen oil gain nearly 40 percent since June, transforming what many initially dismissed as a temporary geopolitical premium into a potentially durable inflation shock.
The Hormuz Risk calculus
The Strait of Hormuz remains the single most important variable in global energy markets. ING analysts Warren Patterson and Ewa Manthey estimate that roughly 5 million barrels per day of crude transit the strait on average, with reported flows ranging between 6 and 8 million barrels daily. Any further escalation that disrupts even a fraction of that volume would have immediate and severe consequences for global supply.
Shipping data from the Kpler platform showed that fewer than 10 commercial vessels crossed the strait daily over the weekend, a dramatic reduction from normal traffic. The disruption has already prompted Asian crude importers including China, Japan, and South Korea to seek alternative supply from as far afield as Argentina, according to anonymous traders cited by Reuters.
Russia has added to supply pressure by extending its diesel export ban through September 30, 2026, with the broader fuel export restrictions set to remain in place until January 31, 2027. The move, announced by Deputy Prime Minister Alexander Novak, aims to stabilize Russia’s domestic fuel market amid seasonal demand increases and unscheduled refinery repairs. The combination of Hormuz uncertainty and the Russian export restriction has tightened both crude and product markets, underpinning prices across the energy complex.
Fed Chair Warsh Sets Up a September Showdown
At the center of the monetary policy drama sits Federal Reserve Chair Kevin Warsh, whose hawkish debut at the annual Jackson Hole symposium in Wyoming on Friday rattled global markets. Warsh made clear that despite recent softer inflation readings, the progress was insufficient and did not tell him that underlying trends had meaningfully improved.
Price stability is not self-executing, nor is inflation necessarily mean-reverting, Warsh told the gathering of central bankers and economists. We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.
The July Personal Consumption Expenditures index stood at 3.3 percent for core inflation and 3.7 percent for headline, both well above the Fed’s 2 percent target. Markets responded swiftly to Warsh’s remarks. The implied probability of a 25-basis-point rate increase at the September 15-16 FOMC meeting jumped to approximately 66 percent on Monday, according to CME Group FedWatch data, nearly double the level before the speech.
Bank of America economist Aditya Bhave wrote in a note that Warsh had raised the bar for standing pat by arguing that the Fed should focus on trends rather than isolated data points. For us, the key takeaway is that Warsh has raised the bar for standing pat, Bhave said. Absent a material downside shock, the onus is now on Warsh to deliver a September hike. Otherwise, he risks undermining some of the credibility he gained on Friday.
Markets Push Back Against the Hawk
Not everyone is convinced a hike is coming. Treasury Secretary Scott Bessent told CNBC on Monday from the G20 summit in Asheville, North Carolina, that he believed the economy was experiencing a supply shock, and that historically central banks do not raise rates into supply shocks until they see second- or third-order effects. Core inflation has remained very, very restrained, he argued.
Citigroup economist Andrew Hollenhorst took a similar view, characterizing Warsh’s comments as more hawkish than usual but only marginally so, and coming amid economic data that indicates no explicit pressing need for tighter monetary policy. On the July FOMC committee there was not a consensus to raise rates, Hollenhorst wrote. Data since that point have shown cooler inflation and softer hiring. There will not be a consensus to hike rates in September.
The tension between these views captures the broader uncertainty facing global central banks. The Polymarket prediction platform shows a near coin-flip between a 25-basis-point hike and no change, reflecting genuine disagreement among sophisticated market participants about the direction of policy.
Oil Complicates Every Central Bank Decision
For markets, the importance of oil pricing extends well beyond the headline number. If Brent settles around $90 or moves materially higher, it becomes much harder for central banks to look through the inflationary consequences. Higher energy prices squeeze household purchasing power, raise business costs, and strengthen the case for keeping monetary policy tight.
European Central Bank policymaker Francois Villeroy de Galhau said last week the ECB might have to adapt its rate cut plans if oil price volatility proved long-lasting. His colleague, ECB Executive Board member Fabio Panetta, warned that Europe’s central banks may come under increasing political pressure as the economic costs of tight policy mount.
The resulting picture is one of extraordinary policy uncertainty. Norway’s central bank delivered a surprise 25-basis-point rate cut last week, its first reduction in five years, taking the policy rate to 4.25 percent. Switzerland cut borrowing costs to zero. Meanwhile, the Fed appears poised to move in the opposite direction. Investors are no longer asking only how much artificial intelligence can increase corporate profits or when central banks will begin cutting interest rates, as one market strategist put it. The question now is whether the global monetary framework that has governed markets for the past two decades still applies.
What Comes Next
The immediate outlook depends on three data points: the August CPI report due September 10, the August PCE reading later in the month, and any further developments in the Strait of Hormuz. If inflation comes in firmer than expected and the oil situation does not improve, the case for a September hike will strengthen considerably. If inflation cools and tensions ease, Warsh may find himself without the votes to act.
Wall Street closed August on a sour note, with the Dow Jones Industrial Average falling 374 points on Monday to 53,186, while the S&P 500 slipped 0.33 percent to 7,686. Treasury 10-year yields climbed to their highest levels since January 2025, reflecting the repricing of rate expectations. The backdrop is becoming less forgiving, and for now, every diplomatic headline from the Gulf is being treated almost like an inflation release.
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